1) Consider the following "lemons market." There are 200 car buyers and 200 car sellers, 100 of which are selling lemons and 100 of which are selling plums. Sellers know exactly which type of car they are selling. Buyers are unable to distinguish one car from another at the time of purchase, a fact known to sellers. Buyers value a car known to be a lemon at $10,000 and value a car known to be a plum at $16,000. Lemon sellers value their car at $8,000 and plum sellers value their car at S14,000. Lastly, both buyers and sellers are price takers (they behave as perfect competitors) and buyers seek to maximize the difference between the expected valuation of their purchase and their purchase price. a) Find market supply. (Either a graphical or numerical characterization of supply suffices.) b) Find market demand. (Either a graphical or numerical characterization of demand suffices.) c) Find the equilibrium price and equilibrium quantity in this market.

1) Consider the following "lemons market." There are 200 car buyers and 200 car sellers, 100 of which are selling lemons and 100 of which are selling plums. Sellers know exactly which type of car they are selling. Buyers are unable to distinguish one car from another at the time of purchase, a fact known to sellers. Buyers value a car known to be a lemon at $10,000 and value a car known to be a plum at $16,000. Lemon sellers value their car at $8,000 and plum sellers value their car at S14,000. Lastly, both buyers and sellers are price takers (they behave as perfect competitors) and buyers seek to maximize the difference between the expected valuation of their purchase and their purchase price. a) Find market supply. (Either a graphical or numerical characterization of supply suffices.) b) Find market demand. (Either a graphical or numerical characterization of demand suffices.) c) Find the equilibrium price and equilibrium quantity in this market.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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