A thousand used cars are for sale in Boston. Some of the cars are of good quality (“plums”), and some are not (“lemons”), but the buyer cannot tell the difference between the two qualities; of course the seller knows whether the car is a lemon or a plum. Suppose that consumers are willing to pay $4,000 for a lemon and $6,400 for a plum; and sellers are willing to sell a lemon for $3,500 and a plum for $5,600. a. If there is a 40% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case. b. If there is a 10% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case?

Principles of Economics 2e
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ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter16: Information, Risk, And Insurance
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A thousand used cars are for sale in Boston. Some of the cars are of good quality (“plums”), and some are not (“lemons”), but the buyer cannot tell the difference between the two qualities; of course the seller knows whether the car is a lemon or a plum. Suppose that consumers are willing to pay $4,000 for a lemon and $6,400 for a plum; and sellers are willing to sell a lemon for $3,500 and a plum for $5,600.

a. If there is a 40% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case.

b. If there is a 10% chance that a car is a lemon, how many cars will be sold? And what is the maximum consumer surplus in this case?

 

 

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