In the market for used cars, there are two types of cars: bad cars, or good cars. The sellers know the qualities of the cars, and they value bad cars at $100 and good cars at $1000. The buyers cannot observe the quality of the cars, and they are willing to pay $100 for a bad car, and $1000 for a good car. Assume that buyers can only offer the same buying price for any car in the market (i.e., buyers cannot discriminate among sellers). What is the equilibrium price in such a market for used cars? a) $550 b) $100 c) $1000 d) Between $100 and $1000 e) This is a case of adverse selection. The equilibrium price cannot be determined.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question

In the market for used cars, there are two types of cars: bad cars, or good cars. The sellers know the qualities of the cars, and they value bad cars at $100 and good cars at $1000. The buyers cannot observe the quality of the cars, and they are willing to pay $100 for a bad car, and $1000 for a good car. Assume that buyers can only offer the same buying price for
any car in the market (i.e., buyers cannot discriminate among sellers). What is the equilibrium price in such a market for used cars?


a) $550
b) $100
c) $1000
d) Between $100 and $1000
e) This is a case of adverse selection. The equilibrium price cannot be determined.

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Fee-for-Service
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education