Consider a used car market with 600 buyers each willing to buy exactly one used car,...

 

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Consider a used car market with 600 buyers each willing to buy exactly one used car, and 500 sellers each having exactly one used car. Out of the 500 used cars, 400 are of good quality (peaches) and 100 are of bad quality (lemons). The monetary valuation of owning a peach is Rs. 100 for a buyer and Rs. 50 for a seller. On the other hand, the monetary valuation of owning a lemon is Rs. 10 for both a buyer and a seller. A seller knows whether the car she owns is a peach or a lemon, whereas a buyer only knows that there are 400 peaches and 100 lemons. Both the buyers and the sellers know the various valuations. What outcome maximizes the aggregate surplus of the economy? Provide a clear explanation for your answer. Consider a used car market with 600 buyers each willing to buy exactly one used car, and 500 sellers each having exactly one used car. Out of the 500 used cars, 400 are of good quality (peaches) and 100 are of bad quality (lemons). The monetary valuation of owning a peach is Rs. 100 for a buyer and Rs. 50 for a seller. On the other hand, the monetary valuation of owning a lemon is Rs. 10 for both a buyer and a seller. A seller knows whether the car she owns is a peach or a lemon, whereas a buyer only knows that there are 400 peaches and 100 lemons. Both the buyers and the sellers know the various valuations. What outcome maximizes the aggregate surplus of the economy? Provide a clear explanation for your answer.

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To determine the outcome that maximizes the aggregate surplus of the economy in this used car market we need to consider the concept of adverse selection and the role of information Adverse selection ... View the full answer