1. There is asymmetric information in the used-car market because _________ (buyers/sellers) cannot distinguish between lemons and plums but _________ (buyers/sellers) can.
2. The supply curve for high-quality used cars lies _________ (above/below) the supply curve for low quality used cars.
3. The following table shows the prices and quantities in three different used-car markets. Complete the table by filling in the last two rows.

4. We will have a thin market for used cars if the minimum supply price for plums (high quality) is _________ (greater than/less than) the willingness to pay for a lemon.
5. Arrows up or down: A decrease in the minimum supply price for a plum (high quality) shifts the plum supply curve _________ and the likelihood of buying a plum _________.
6. Suppose you are willing to pay $1,000 for a low-quality used car and $5,000 for a high-quality used car. If there is an 80 percent chance of getting a low-quality car and a 20 percent chance of getting a high-quality car, you are willing to pay $ _________ for a used car.
7. Consumer Reports. You want to buy a used car, specifically a 1999 Zephyr. According to Consumer Reports, half the 1999 Zephyrs now on the road are lemons, meaning they break down frequently and generate large repair bills. Consumers are willing to pay $2,000 for a lemon, but $5,000 for a plum. According to Ms. Wizard, The equilibrium price of used 1999 Zephyrs will be $2,000 in Sourland but $2,600 in Sweetland.
a. Illustrate with a complete graph for each market.
b. What is the fundamental difference between the twomarkets?

Transcribed Image Text:

Market A Market B Market C Assumed chance of getting a lemon 60% 80% 95% Willingness to pay for a S6,000$5,000$4,500 used car Number oflemons supplied Number of plums supplied Total number of used cars supplied 70 30 100 40 10 50 90 10 100 If disequilibrium, will price then rise or drop?