Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 4.A, Problem 1AP
Subpart (a):
To determine
Impact of asymmetric information on the price .
Sub Part b:
To determine
Impact of asymmetric information on the price.
Sub Part (c):
To determine
Impact of asymmetric information on the price.
Sub Part (d):
To determine
Impact of asymmetric information on the price.
Sub Part (e):
To determine
Impact of asymmetric information on the price.
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In the used-car market there are good cars and bad cars. Everyone knows that half of the used cars are good and half
of them are bad, but only the owner knows exactly whether his particular car is good or bad.
If a car is good, it is worth $3000 to its owner but worth $4000 to a potential buyer. A bad car, on the other hand, is
worth only $2000 to its owner and $1000 to a potential buyer. A potential buyer has no way of telling whether a
particular car is good or bad. However, she is aware of the fact that the seller knows the car's quality.
(VI.1)
If the price of a car is $2500, what type of car will be offered for sale?
Only bad cars/
All cars/
Only good cars/
No car.
(choose the right answer)
Should a potential buyer buy a car that is being offered for sale at $2500?
Yes/
No
(choose the right answer)
If the price of a car is $3500, what type of car will be offered for sale?
Only bad cars/
Only good cars/
All cars/
No car.
(choose the right answer)
What is the buyer's expected value…
4. Consider the market for Citrus used car in which lemons account for 40% of the used cars offered for
sale. Suppose that each owner of an orange Citrus values it at $12,000; he is willing to part with it for a
price of at least $12,000, but not lower than this. Similarly, each owner of a lemon Citrus values it at
$4,000. Suppose that potential buyers are willing to pay more for each type. If a buyer could be confi-
dent that the car he was buying was an orange, he would be willing to pay $15,000 for it; if the car was a
known lemon, he would be willing to pay $5,000.
Suppose that there are many buyers, but a limited number of used cars. What type of used cars -
lemons or oranges - will be offered for sale in the market, and at what prices?
Chapter 4 Solutions
Microeconomics
Ch. 4.A - Prob. 1ADQCh. 4.A - Prob. 2ADQCh. 4.A - Prob. 3ADQCh. 4.A - Prob. 1ARQCh. 4.A - Prob. 2ARQCh. 4.A - Prob. 3ARQCh. 4.A - Prob. 1APCh. 4 - Prob. 1DQCh. 4 - Prob. 2DQCh. 4 - Prob. 3DQ
Ch. 4 - Prob. 4DQCh. 4 - Prob. 5DQCh. 4 - Prob. 6DQCh. 4 - Prob. 7DQCh. 4 - Prob. 8DQCh. 4 - Prob. 9DQCh. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Prob. 7RQCh. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Prob. 3PCh. 4 - Prob. 4PCh. 4 - Prob. 5PCh. 4 - Prob. 6PCh. 4 - Prob. 7P
Knowledge Booster
Similar questions
- Suppose there are only two kind of cars in the market for used cars: lemons and good cars. A lemon is worth $1,000 both to its current owner and to anyone who buys it. A good car is worth $8,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car, and there is no warranty. What is the prevailing price of a used car? $8,000 $4,500 $1,000 The prevailing price depends on how many lemons and how many good cars are traded.arrow_forward6. Answer which happens, moral hazard or adverse selection, or nothing happens under each of the following situations. [M20]: A driver drives a car rough because s/he has a property insurance of a car. b. Adverse selection [M21]: Since a driver cannot distinguish among qualities of cars, s/he may buy a bad one. a. Moral hazard c. nothing a. Moral hazard b. Adverse selection c. nothing [M22]: Banks look for lenders, but most customers who apply for loans seem to have difficulty repaying them even in assuming they make an identical effort. a. Moral hazard b. Adverse selection c. nothingarrow_forwardSuppose there are three types of used cars that consumers are willing to purchase: “Good”; “OK”; and “Bad”. Consumers are willing to pay $10,000 for a Good car, and because they will require more work, consumers are willing to pay $7,000 for an OK car, and $3,000 for a Bad car. All types of car appear identical to consumers—the only differences are with regard to latent mechanical and electronic attributes that can be detected only by an expert. Although there is no way for consumers to determine the type of car they are purchasing before they purchase, all consumers know that 50% of used cars are Good, 25% are OK, and 25% are Bad. Further, consumers will be able to determine what type of car they have purchased after owning the car for 3 months. Suppose that the attached table describes the minimum price that sellers of different types of cars are willing to accept from a buyer. Given these values, what type of cars will be sold in the market? A) Good cars only B) Good and OK cars…arrow_forward
- Suppose there are three types of used cars that consumers are willing to purchase: “Good”; “OK”; and “Bad”. Consumers are willing to pay $10,000 for a Good car, and because they will require more work, consumers are willing to pay $7,000 for an OK car, and $3,000 for a Bad car. All types of car appear identical to consumers—the only differences are with regard to latent mechanical and electronic attributes that can be detected only by an expert. Although there is no way for consumers to determine the type of car they are purchasing before they purchase, all consumers know that 50% of used cars are Good, 25% are OK, and 25% are Bad. Further, consumers will be able to determine what type of car they have purchased after owning the car for 3 months. The attached table describes the minimum price that sellers of different types of cars are willing to accept from a buyer. Suppose that a car seller can purchase a report that credibly reveals the true type of their car for $300. Who will…arrow_forward3. Briefly explain how asymmetric information in the used car market can result in adverse selection and what can be done to mitigate the problem.arrow_forwardHalf of the used cars for sale in a market are good and the other half are lemons. Owners of good cars are willing to sell them for $1,200, while owners of lemons are willing to sell them for $50. There are many potential buyers who are willing to pay $1,500 for a good car and $300 for a lemon. Buyers cannot tell good cars from lemons, but the original owners know whether a car is a lemon or not. There will be an equilibrium in which all used cars sell for $1,150. There will be an equilibrium in which lemons sell for $50 and good used cars sell for $1,200. There will be an equilibrium in which all used cars sell for $800. The only equilibrium is one in which only lemons are sold. There will be an equilibrium in which lemons sell for $300 and good used cars sell for $1,500.arrow_forward
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