Let us take a car market where we know(but the buyers don`t) that 40 percent of the cars are bad cars(lemons), the reservation price for demanders is 12 (thousand) for good cars and 10 (thousand) for bad cars, while the reservation price for the car suppliers is 10 thousand for a good car, and 8 thousand if it is a bad car.
Let us take a car market where we know(but the buyers don`t) that 40 percent of the cars are bad cars(lemons), the reservation
a-Discuss what the situation would be like if everybody could observe if a car is a good car, or a bad car(lemon)- how would the market reach equilibrium?
b-Discuss what the situation would be like if only sellers knew the true character of the car( good or bad) whereas the buyers only know the average car quality?
c-Why would the second situation create a partial unraveling of the market? What are the only cars that can be bought and sold?
d-Prove why the in question 3b equilibrium is a suboptimal outcome?
e-Why does a similar situation in the labor market result in a signaling equilibrium? Sketch your way of thinking, and show in which case there would be a separating equilibrium?
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