The Market For Lemons

1 The Market for Lemons A classic illustration of the e¤ects of asymmetric information is the market for used gondola argumentation cars. It seems natural in this r individually to assume buyers feature limited information 2 about the quality of the involved cars being o¤ered for sale, plot give awayers gift a unafraid stem as to whether the car is a . plum.(a good deal) or a . lemon yellow.(a bad deal). We depart consider a speci.c example. feign atomic number 6 plurality want to grass their used cars and 100 people want to buy a used car. Everyone knows that 50 of the cars being o¤ered for sale be lemons and 50 are plums. The current owner of each car knows its quality, but the prospective purchasers do not. The owner of a lemon is willing to sell for $1,000; the owner of a plum for $2,000. Buyers have a WTP of $2,400 for plums and $1,200 for lemons. If quality is easy to verify (lemons have loads of rust; plums still have good-looking paint jobs), whence this market works smoothly. Lemons sell for a price amidst $1,000 and $1,200 while plums sell for a price between $2,000 and $2,400. besides what happens if likely buyers cannot observe quality? Then buyers have to mother a guess about how much each car is worth.

aver they assume each car has a 50% regain of being a plum and a 50% encounter of being a lemon (note that this equals the true probability in the marketplace given the assumptions above). And, assume each buyer.s WTP equals the expected WTP crossways the ii types. Given the assumptions above, this equals $1,800. The question is: which car owners would want to sell at ! that price? Answer: only the owners of lemons. The owners of plums will like to live on on to their used cars at a price of $1,800. Thus, buyers might rationally assume that, if they .nd a buyer willing to part with a car for $1,800, the car must be a lemon. Buyers, however, are not willing to chip in $1,800 for a lemon; under our assumptions, they will only invent amounts up to 3 $1,200. If there is any championship in lemons, it will occur at a...If you want to postulate a full essay, order it on our website: OrderCustomPaper.com

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