Suppose that in a market for used cars,there are good used cars and bad used cars (lemons).Consumers are willing to pay as much as $6,000 for a good used car but only $1,000 for a lemon.Sellers of good used cars value their cars at $5,000 each and sellers of lemons value their cars at $800 each.Buyers cannot tell if a used car is reliable or is a lemon.Based on this information,what is the likely outcome in the market for used cars?

Question

Quizplus · Accepted Answer

In this market, buyers cannot differentiate between good used cars and lemons. Therefore, they are willing to pay an average price between the two: ($6,000 + $1,000) / 2 = $3,500. However, sellers of good used cars will not be willing to sell for such a low price as they value their cars at $5,000. As a result, only sellers of lemons will be willing to sell their cars at the market price of $3,500, leaving buyers with mostly lemons in the market. This is known as the market for lemons or information asymmetry. Therefore, choice D is the likely outcome in this market.

Suppose That in a Market for Used Cars,there Are Good