If buyers cannot assess the quality of used cars and there are no warranties,
A) only lemons are sold.
B) only good used cars are sold.
C) good cars are sold at a higher price than bad cars.
D) there is no adverse selection problem.
E) lemons and good cars sell for the same price.

Question

Quizplus · Accepted Answer

In this scenario, buyers are unable to differentiate between good and bad quality used cars, so they are likely to choose a car at a price they feel comfortable with. As a result, sellers of good used cars may ask for a higher price, but buyers are unlikely to purchase cars with higher prices if they cannot differentiate between a good and a bad car. Thus, only lemons will sell because buyers are more likely to purchase a cheaper, lower quality car if they cannot differentiate between the two. This market failure, known as the "Lemons Problem," occurs because there is an information asymmetry between buyers and sellers, which makes it difficult for buyers to assess the quality of used cars.

If Buyers Cannot Assess the Quality of Used Cars and There