Question

Can Someone please help me understand? Need to finish this problem soon

1. What is the equilibrium price and quantity in the used car market below? Why aren't the other 2 points labeled considered equilibrium points? Supply of high-aliy ca plu Supply of ality cars (leso) Price $10,000 WTP with 60/80 expectations WTP with pessimistic 4,000 expectations 70 30 40 Nunber of used cas sold per day

Answer 1

Market equilibrium is at c.

Point a or b is not an equilibrium. Note that the buyers are not aware of the quality type, so they believe that there is a 50 50 chance of getting a used car. In this manner the demand function is WTP with 50-50 expectations.

Sellers have this information and also the information about the quality of the car they are selling. They realised that buyers willp ₹4000 if they believe the car to be a lemon, but willingness to receive by the suppliers of high quality cars is greater than $4000. This indicates that the suppliers of high quality cars will leave the market and only the low quality cars are supplied

When buyers realised that only lemons are sold in the market, they will offer a price of $4000. This makes the equilibrium stable at point c