The option that correctly explains the used-car market.

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Chapter 12, Problem 4MCQ

To determine

To identify:

The option that correctly explains the used-car market.

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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 Percentage of Cars 20% Value to Seller Value to Buyer 50% 30% $20,000 $15,000 $10,000 $24,000 $18,000 $12,000 Moderate Low 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.

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