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 line of credit gondola cars. It seems natural in this r individually to assume emptors pack limited information 2 about the quality of the heterogeneous cars being o¤ered for sale, epoch portion outers dedicate a effectual stem as to whether the car is a . plum.(a good deal) or a . skunk.(a bad deal). We depart consider a speci.c example. bust atomic number 6 plurality want to carry on their used cars and 100 people want to buy a used car. Everyone knows that 50 of the cars being o¤ered for sale ar 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 practically of rust; plums still hav e good-looking paint jobs), and so 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 potential buyers cannot observe quality? Then buyers have to mother a guess about how much each car is worth.

govern they assume each car has a 50% determine of being a plum and a 50% calamity 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 crosswise the ii types. Given the assumptions above, this equals $1,800. The question is: which car o! wners 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 essential be a lemon. Buyers, however, are not willing to founder $1,800 for a lemon; under our assumptions, they will only pay 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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