Question 41 ptsConsider the market for used cars. Suppose that there are "good" used cars and "lemons" (or carsthat are likely to fall apart quickly).Suppose that owners of "good" used cars would be willing to sell for $10,000 and owners of"lemons" will sell their car for $2,00O. Furthermore, assume buyers are willing to pay $12,000 for a"good" car and $3,000 for a lemon. Assume that sellers know if their car is good or a lemon, butbuyers cannot differentiate between good cars and lemons.This situation is an example ofbulk markups that occur with adverse selectionan adverse selection death spiralex-post moral hazardex-ante moral hazard

Consider the market for used cars. Suppose that there are "good" used cars and "lemons" (or cars that are likely to fall apart quickly). Suppose that owners of "good" used cars would be willing to sell for $10,000 and owners of "lemons" will sell their car for $2,000. Furthermore, assume buyers are willing to pay $12,000 fo "good" car and $3,000 for a lemon. Assume that sellers know if their car is good or a lemon, but buyers cannot differentiate between good cars and lemons. This situation is an example of O bulk markups that occur with adverse selection O an adverse selection death spiral O ex-post moral hazard O ex-ante moral hazard

Consider the market for used cars. Suppose that there are "good" used cars and "lemons" (or cars that are likely to fall apart quickly). Suppose that owners of "good" used cars would be willing to sell for $10,000 and owners of "lemons" will sell their car for $2,000. Furthermore, assume buyers are willing to pay $12,000 fo "good" car and $3,000 for a lemon. Assume that sellers know if their car is good or a lemon, but buyers cannot differentiate between good cars and lemons. This situation is an example of O bulk markups that occur with adverse selection O an adverse selection death spiral O ex-post moral hazard O ex-ante moral hazard

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter4: Utility Maximization And Choice

Section: Chapter Questions

Problem 4.2P

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11) Consider a market for used cars. Suppose there are only two kind of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners. Buyers can't tell whether a car is a lemon untilafter they have bought the car. What do economists call the problem that buyers of used cars face? What is the price of a used car? Explain and substantiate your answer. 12) How can a warranty at the seller's expense signal that a product is high quality?
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