question archive There are 2 types of new cars available at dealerships: good cars and lemons (which break down often)
There are 2 types of new cars available at dealerships: good cars and lemons (which break down often)
Subject:EconomicsPrice: Bought3
There are 2 types of new cars available at dealerships: good cars and lemons (which break down often).
The fraction of lemons at a dealership is λ.
Note that Dealers do not publicly distinguish good cars versus lemons; they sell what's on the lot at the sticker price.
Buyers cannot tell apart good cars and lemons. But they know that some fraction (percentage) λ ∈ [0, 1] of cars are lemons. - After buyers have owned the car for any period of time, they also can tell whether or not they have bought a lemon. -
Assume that good cars are worth $20, 000 to buyers
Assume that lemons are worth $10, 000 to buyers.
For simplicity (and without loss of generality), assume that cars do not deteriorate and that buyers are risk neutral.
As a Result, the Pcars = (1 − λ) · 20, 000 + λ · 10, 000
A. If 50% of the Used Cars on the market are lemons, how much would a consumer be willing to pay for a used car, if there was no method to separate the lemons from the good cars.
