Used cars are either lemons or peaches, and only owners know the type, buyers do not. Buyers value a peach at $4000 and a lemon at $200, and owners value a peach at $3000 and a lemon at $100. A) If there were perfect information (both sides know the type), would we have mutually beneficial transactions? If so, what is the range of prices? B) Without perfect information, and a 50% chance of a peach or lemon would there be mutually beneficial transactions? C) If owners could have the car verified as peach or lemon for $100, which owners would get the certificate? Show why.

Used cars are either lemons or peaches, and only owners know the type, buyers do not. Buyers value a peach at $4000 and a lemon at $200, and owners value a peach at $3000 and a lemon at $100. A) If there were perfect information (both sides know the type), would we have mutually beneficial transactions? If so, what is the range of prices? B) Without perfect information, and a 50% chance of a peach or lemon would there be mutually beneficial transactions? C) If owners could have the car verified as peach or lemon for $100, which owners would get the certificate? Show why.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter8: Game Theory

Section: Chapter Questions

Problem 8.8P

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