3. Consider the following Lemons market. Suppose that a peach is worth $10,000 to a buyer...

 

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3. Consider the following "Lemons" market. Suppose that a peach is worth $10,000 to a buyer and $6,000 to a seller and that a lemon is worth $3000 to a buyer and $500 to a seller. 4/5 of the cars are peaches and 1/5 are lemons. There are a total of 5000 cars in the market (supply is fixed) and there are an infinite number of potential buyers. (20 points total, 5 points each) a. Draw the supply and demand curves for both markets under perfect observability. What are the equilibrium prices in each market? b. With risk neutrality and symmetric but imperfect information (i.e. neither the buyer nor the seller know which type of car they have), will the market clear? If so, what is the price? c. Suppose instead that there is asymmetric information of the following form: The seller knows what type of car they have, and the buyer does not. Can a market exist with the current values and probabilities? If so, what will the equilibrium price be? If not, why? and is this efficient? d. Suppose instead that the value of a peach to a seller is $9500. Everything else remains the same. Can a market exist with the current values and probabilities? If so, what will the equilibrium price be? If not, why? and is this efficient? 3. Consider the following "Lemons" market. Suppose that a peach is worth $10,000 to a buyer and $6,000 to a seller and that a lemon is worth $3000 to a buyer and $500 to a seller. 4/5 of the cars are peaches and 1/5 are lemons. There are a total of 5000 cars in the market (supply is fixed) and there are an infinite number of potential buyers. (20 points total, 5 points each) a. Draw the supply and demand curves for both markets under perfect observability. What are the equilibrium prices in each market? b. With risk neutrality and symmetric but imperfect information (i.e. neither the buyer nor the seller know which type of car they have), will the market clear? If so, what is the price? c. Suppose instead that there is asymmetric information of the following form: The seller knows what type of car they have, and the buyer does not. Can a market exist with the current values and probabilities? If so, what will the equilibrium price be? If not, why? and is this efficient? d. Suppose instead that the value of a peach to a seller is $9500. Everything else remains the same. Can a market exist with the current values and probabilities? If so, what will the equilibrium price be? If not, why? and is this efficient?