If buyers cannot distinguish a good used car, worth $15,000, from a “lemon,” worth $5,000; explain what will happen to the market for used cars.
If buyers cannot distinguish a good used car, worth $15,000, from a “lemon,” worth $5,000; explain what will happen to the market for used cars.
Homework Answers
If buyers are unable to distinguish between the lemons and good used cars, the average price ($10000) offered will be much less than the value of a good used car ($15000). This will result in the owners keeping their good used car off market. That is they will not sell their good used car in the market. Then only the lemons will remain in the market. When only lemons will be available in the market the average price is bound to fall. The buyers therefore, as they are unable to identify good cars and lemons will be subject to adverse selection.
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If buyers cannot distinguish a good used car, worth $15,000, from a “lemon,” worth $5,000; explain what will happen to the market for used cars.
1. Suppose there are two kinds of used cars, good cars and lemons. A good car...
1. Suppose there are two kinds of used cars, good cars and lemons. A good car is worth $10,000, and a lemon is worth $2,000. Owners of used cars know where the car is good or bad, but potential buyers do not. (a) Supposing half of all cars are good and half are lemons, what is the expected value of a used car of unknown quality? (b) Based on your answer to part (a), do you expect owners of used...
Consider a used-car market with asymmetric information. The owners of used cars know what their vehicles...
Consider a used-car market with asymmetric information. The owners of used cars know what their vehicles are worth but have no way of credibly demonstrating those values to potential buyers. Thus, potential buyers must always worry that the used car they are being offered may be a low-quality "lemon." Instructions: Enter your answers as whole numbers. a. Suppose that there are equal numbers of good and bad used cars in the market and that good used cars are worth $13,000 while bad...
Read Eye on the Market for Used Cars, and then explain how a warranty signals that...
Read Eye on the Market for Used Cars, and then explain how a warranty signals that a car isn't a lemon and why it is in a used-car dealer's self-interest to offer a warranty. A warranty signals that a car isn't a lemon because A. giving warranties on lemons results in dealers bearing a high cost of repair O B. "lemon laws" require dealers to honor warranties O C. a warranty creates asymmetric information O D. private sellers, who sell...
Suppose there are 50 sellers of cars in a used car market who know the quality...
Suppose there are 50 sellers of cars in a used car market who know the quality of their car. Of these 50 sellers, 25 own plums. Each owner of a plum is willing to sell her car as long as she receives at least $4000 for it. The remaining sellers own lemons, which each would be willing to sell for at least $2000. There are also 50 potential buyers. a) Suppose that each buyer is willing to pay up to...
Warranties work as signals in the used car market because _______. A. buyers want to believe...
Warranties work as signals in the used car market because _______. A. buyers want to believe they're getting a good deal B. all car dealers are more interested in their customers than in their own profit C. buyers are not sophisticated enough to distinguish an honest dealer from a dishonest one D. a dealer who sells a lemon with a warranty ends up paying a big repair bill, so dealers are careful to avoid selling lemons The principle of ______...
can someone explain how to work out part b *edit*: better picture 1. Consider the market for used cars shown in the figure below. The left panel (a) shows the market for low-quality cars (lemo...
can someone explain how to work out part b
*edit*: better picture
1. Consider the market for used cars shown in the figure below. The left panel (a) shows the market for low-quality cars (lemons); the right panel (b) shows the market for high-quality cars (plums). If all buyers and sellers had full information about the quality of automobiles being offered for sale, lemons would sell for $8,000 and plums would sell for $16,000. Price,() (S/car) (a) Lemons (b) Plums...
Suppose the market for used cars has 75 sellers with cars in good condition and 25 sellers with cars in bad condition (...
Suppose the market for used cars has 75 sellers with cars in
good condition and 25 sellers with cars in bad condition
("lemons").
5. Suppose the market for used cars has 75 sellers with cars in good condition and 25 sellers with cars in bad condition ("lemons"). There are an unlimited number of potential buyers. Buyers are willing to pay $10,000 for cars in good condition while the sellers value these cars at $7,000. Buyers are willing to pay $300...
Suppose there are 100 sellers, each offering one used car, and 200 buyers, each wanting one...
Suppose there are 100 sellers, each offering one used car, and 200 buyers, each wanting one used car. A used car could be of high or low quality. There are 50 high-quality cars and 50 low-quality cars. A high-quality used car is worth $10,000 to the buyer whereas a low-quality used car is worth $2,0000 to the buyer. A seller knows the car’s quality. (a) Suppose a buyer can observe the car’s quality. What is the buyer’s maximum willingness to...
Suppose that everyone in a used-car example is risk neutral, potential car buyers value lemons at...
Suppose that everyone in a used-car example is risk neutral, potential car buyers value lemons at $1,500 and good used cars at $2,200, the reservation price of lemon owners is $500, and the reservation price of owners of high-quality used cars is $2,000. The share of current owners who have lemons is 0. For what values of 0 do all the potential sellers sell their used cars? Describe the equilibrium. The most a risk-neutral buyer would be willing to pay...
1. Consider the market for cars. Explain what will happen to the supply of cars if...
1. Consider the market for cars. Explain what will happen to the supply of cars if there is an improvement in car manufacturing technology. How does price, quantity, producer surplus, and consumer surplus get affected (increase or decrease)? Do we know for sure if producer surplus will increase or decrease? Now assume that the city builds new bike paths and increases the demand for biking, what will happen to the demand for cars? What happens to the price and quantity...
Consider a used-car market with asymmetric information. The owners of used cars know what their vehicles are worth but have no way of credibly demonstrating those values to potential buyers. Thus, potential buyers must always worry that the used car they are being offered may be a low-quality "lemon." Instructions: Enter your answers as whole numbers. a. Suppose that there are equal numbers of good and bad used cars in the market and that good used cars are worth $13,000 while bad...
Read Eye on the Market for Used Cars, and then explain how a warranty signals that a car isn't a lemon and why it is in a used-car dealer's self-interest to offer a warranty. A warranty signals that a car isn't a lemon because A. giving warranties on lemons results in dealers bearing a high cost of repair O B. "lemon laws" require dealers to honor warranties O C. a warranty creates asymmetric information O D. private sellers, who sell...
can someone explain how to work out part b
*edit*: better picture
1. Consider the market for used cars shown in the figure below. The left panel (a) shows the market for low-quality cars (lemons); the right panel (b) shows the market for high-quality cars (plums). If all buyers and sellers had full information about the quality of automobiles being offered for sale, lemons would sell for $8,000 and plums would sell for $16,000. Price,() (S/car) (a) Lemons (b) Plums...
Suppose the market for used cars has 75 sellers with cars in
good condition and 25 sellers with cars in bad condition
("lemons").
5. Suppose the market for used cars has 75 sellers with cars in good condition and 25 sellers with cars in bad condition ("lemons"). There are an unlimited number of potential buyers. Buyers are willing to pay $10,000 for cars in good condition while the sellers value these cars at $7,000. Buyers are willing to pay $300...
Suppose that everyone in a used-car example is risk neutral, potential car buyers value lemons at $1,500 and good used cars at $2,200, the reservation price of lemon owners is $500, and the reservation price of owners of high-quality used cars is $2,000. The share of current owners who have lemons is 0. For what values of 0 do all the potential sellers sell their used cars? Describe the equilibrium. The most a risk-neutral buyer would be willing to pay...
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