Consider the market of used cars. Sellers have two types of cars: peaches (cars in good...

   

Transcribed Image Text:

Consider the market of used cars. Sellers have two types of cars: peaches (cars in good condition) and lemons (cars in bad condition). If a potential buyer is able to identify quality of a car, his is willing to pay $10000 for a peach and $5000 for a lemon. On the other hand, sellers is willing to sell a peach at $7500 and a lemon at $4000. The game unfolds as below: first, sellers choose to sell or not, and at which price to sell. After that, potential buyers choose to buy or not. Find equilibrium decisions in the following situations: a. There are four times as many peaches as lemons (q-4/5); (15 pts) b. There are four times as many lemons as peaches (q=1/5). (15 pts) Consider the market of used cars. Sellers have two types of cars: peaches (cars in good condition) and lemons (cars in bad condition). If a potential buyer is able to identify quality of a car, his is willing to pay $10000 for a peach and $5000 for a lemon. On the other hand, sellers is willing to sell a peach at $7500 and a lemon at $4000. The game unfolds as below: first, sellers choose to sell or not, and at which price to sell. After that, potential buyers choose to buy or not. Find equilibrium decisions in the following situations: a. There are four times as many peaches as lemons (q-4/5); (15 pts) b. There are four times as many lemons as peaches (q=1/5). (15 pts)

Answer rating: 100% (QA)

The scenario described is a classic example of the market for lemons a term popularized by economist George Akerlof in his 1970 paper The Market for L... View the full answer