Consider the market for used cars in Citrustown. There are 300 used cars for sale. Suppose that half of used cars are lemons (in other words, they are of poor quality) and the sellers of lemons are each willing to sell their car for $800. Suppose that half of used cars are plums (in other words, they are of good quality) and the sellers of plums are each willing to sell their car for $7,000. Buyers are willing to pay $7,500 for a plum and $1,000 for a lemon. Buyers know that half of the used cars are lemons, and half are plums, but they do not know which individual cars are lemons or plums. a) What is the equilibrium price of used cars in Citrustown? In equilibrium, which used cars will be bought and sold? Defend your answer. b) Now suppose that the Acme Company will inspect a car for a fee of $150. After an inspection, Acme will give the owner a certificate that says whether the car is good quality or poor quality. Acme is completely trustworthy; if an owner has a certificate from Acme that says a car is good quality, a buyer can be certain that the car is good quality. In equilibrium, what will be the price of a good quality car in Citrustown? Defend your answer. In equilibrium, what will be the price of a poor quality car in Citrustown? Defend your answer. c) What concept does this question demonstrate? Defend your answer.
Consider the market for used cars in Citrustown. There are 300 used cars for sale. Suppose that half of used cars are lemons (in other words, they are of poor quality) and the sellers of lemons are each willing to sell their car for $800. Suppose that half of used cars are plums (in other words, they are of good quality) and the sellers of plums are each willing to sell their car for $7,000. Buyers are willing to pay $7,500 for a plum and $1,000 for a lemon. Buyers know that half of the used cars are lemons, and half are plums, but they do not know which individual cars are lemons or plums. a) What is the equilibrium price of used cars in Citrustown? In equilibrium, which used cars will be bought and sold? Defend your answer. b) Now suppose that the Acme Company will inspect a car for a fee of $150. After an inspection, Acme will give the owner a certificate that says whether the car is good quality or poor quality. Acme is completely trustworthy; if an owner has a certificate from Acme that says a car is good quality, a buyer can be certain that the car is good quality. In equilibrium, what will be the price of a good quality car in Citrustown? Defend your answer. In equilibrium, what will be the price of a poor quality car in Citrustown? Defend your answer. c) What concept does this question demonstrate? Defend your answer.
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter16: Information, Risk, And Insurance
Section: Chapter Questions
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Transcribed Image Text:Consider the market for used cars in Citrustown. There are 300 used cars for sale. Suppose that half of used cars
are lemons (in other words, they are of poor quality) and the sellers of lemons are each willing to sell thelr car for
$800. Suppose that half of used cars are plums (in other words, they are of good quality) and the sellers of plums
are each willing to sell their car for $7,000.
Buyers are willing to pay $7,500 for a plum and $1,000 for a lemon. Buyers know that half of the used cars are
lemons, and half are plums, but they do not know which individual cars are lemons or plums.
a) What is the equilibrium price of used cars in Citrustown? In equilibrium, which used cars will be bought and sold?
Defend your answer.
b) Now suppose that the Acme Company will inspect a car for a fee of $150. After an inspection, Acme will give
the owner a certificate that says whether the car is good quality or poor quality. Acme is completely trustworthy; if
an owner has a certificate from Acme that says a car is good quality, a buyer can be certain that the car is good
quality.
In equilibrium, what will be the price of a good quality car in Citrustown? Defend your answer.
In equilibrium, what will be the price of a poor quality car in Citrustown? Defend your answer.
c) What concept does this question demonstrate? Defend your answer.
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