Suppose the market for used cars has 50% good cars (peaches) and 50% bad cars (lemons). There are an unlimited number of potential buyers. Buyers are willing to pay $9,000 for a good car and $3,000 for a bad car. Sellers value good cars at $6,500 and bad cars at $1,000. p1. If both buyers and sellers know whether cars are good or bad, which cars will sell in the market and at what price or prices? p2. If neither buyers nor sellers know whether cars are good or bad, which cars will sell in the market and at what price or prices? p3. If only sellers know whether cars are good or bad, which cars will sell in the market and at what price or prices? Justify your answer.
Suppose the market for used cars has 50% good cars (peaches) and 50% bad cars (lemons). There are an unlimited number of potential buyers. Buyers are willing to pay $9,000 for a good car and $3,000 for a bad car. Sellers value good cars at $6,500 and bad cars at $1,000. p1. If both buyers and sellers know whether cars are good or bad, which cars will sell in the market and at what price or prices? p2. If neither buyers nor sellers know whether cars are good or bad, which cars will sell in the market and at what price or prices? p3. If only sellers know whether cars are good or bad, which cars will sell in the market and at what price or prices? Justify your answer.
Chapter8: Game Theory
Section: Chapter Questions
Problem 8.8P
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Suppose the market for used cars has 50% good cars (peaches) and 50% bad cars (lemons). There are an unlimited number of potential buyers. Buyers are willing to pay $9,000 for a good car and $3,000 for a bad car. Sellers value good cars at $6,500 and bad cars at $1,000.
p1.
If both buyers and sellers know whether cars are good or bad, which cars will sell in the market and at what price or prices?
p2.
If neither buyers nor sellers know whether cars are good or bad, which cars will sell in the market and at what price or prices?
p3.
If only sellers know whether cars are good or bad, which cars will sell in the market and at what price or prices? Justify your answer.
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