This question is about asymmetric information. Assume a market for used cars. There are two types...

 

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This question is about asymmetric information. Assume a market for used cars. There are two types of cars - good cars and lemons. The market share of good cars is 0.4. The market share of lemons is 0.6. Buyers' valuation for good cars is 1000 and for lemons it is 500. Sellers are willing to sell good cars for 800 and lemons for 200. Sellers will first set a price for the car and then buyers can accept or reject the offer. Assume that buyers accept the offer if it equals at least their willingness to pay. a) Assume the quality of a car is observable for buyers and sellers. What kind of cars will be sold on the market? At which price(s) are the cars sold? b) Assume now that the quality of a car is only observable to the sellers. What kind of cars will be sold on the market? At which price(s) are the cars sold? c) Asymmetric information is a market failure. Name two other market failures. (You do not have to explain them.) This question is about asymmetric information. Assume a market for used cars. There are two types of cars - good cars and lemons. The market share of good cars is 0.4. The market share of lemons is 0.6. Buyers' valuation for good cars is 1000 and for lemons it is 500. Sellers are willing to sell good cars for 800 and lemons for 200. Sellers will first set a price for the car and then buyers can accept or reject the offer. Assume that buyers accept the offer if it equals at least their willingness to pay. a) Assume the quality of a car is observable for buyers and sellers. What kind of cars will be sold on the market? At which price(s) are the cars sold? b) Assume now that the quality of a car is only observable to the sellers. What kind of cars will be sold on the market? At which price(s) are the cars sold? c) Asymmetric information is a market failure. Name two other market failures. (You do not have to explain them.)

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