1 Lemons Market Assume that there is a market for used cars where the market is characterized by the table below. Further assume that buyers are not budget constrained and have the capacity to buy all of the cares on the market should they choose to. Quality Level High Moderate Low Percentage of Cars Value to Seller Value to Buyer 20% $20,000 $24,000 50% $15,000 $18,000 30% $10,000 $12,000 a. Assume that both sides of the market can accurately identify the quality of the cars. Explain the potential equilibrium of the market. b. Assume instead that neither side of the market knows the quality of a car until after a transaction. Explain the potential equilibrium of the market. c. Assume now that the sellers know the quality of the car they are trying to sell while the buyers only discover this information after a transaction. Can you find a market equilibrium in which all cars sell? Only Moderate and Low? Provide a clear argument along with the equilibrium structure for each case.

1 Lemons Market Assume that there is a market for used cars where the market is characterized by the table below. Further assume that buyers are not budget constrained and have the capacity to buy all of the cares on the market should they choose to. Quality Level High Moderate Low Percentage of Cars Value to Seller Value to Buyer 20% $20,000 $24,000 50% $15,000 $18,000 30% $10,000 $12,000 a. Assume that both sides of the market can accurately identify the quality of the cars. Explain the potential equilibrium of the market. b. Assume instead that neither side of the market knows the quality of a car until after a transaction. Explain the potential equilibrium of the market. c. Assume now that the sellers know the quality of the car they are trying to sell while the buyers only discover this information after a transaction. Can you find a market equilibrium in which all cars sell? Only Moderate and Low? Provide a clear argument along with the equilibrium structure for each case.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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