Suppose a market for used cars. Potential buyers can not ascertain the quality of a...
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Suppose a market for used cars. Potential buyers can not ascertain the quality of a car that is offered to them easily. However, from experience, they estimate that about 50% of all cars being offered in the market are of high quality while 50% are of low quality. Moreover, they value a high quality car being worth 20.000 TL and a low quality car being worth 5.000 TL. Supply of high-quality cars is given by QH = PH 10.000, while the supply of low-quality cars follows QL = 4PL 10.000.
a) What is the maximum price buyers would be willing to pay for any used car? How many high-quality cars will be available at that price? How many low-quality will be offered at that price? b) Are potential buyers correct that 50% of used cars offered for sale are high-quality? If buyers are not correct, explain what will happen in the market over time if they adjust their expectations to the true odds of buying a high-quality car.
c) Discuss possible solutions to this so-called lemon problem and give at least one other example for a market with asymmetric information. Also give an example for a market with hidden action
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