Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling. but buyers do not Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30.000, and a low quality used car is worth $15,000. Based on this probability, the most that a buyer would be willing to pay for a used car is $ 25500. (Enter your response rounded to the nearest dollar.) Which of the following would best "solve" the asymmetric information problem in this market? O A. Prohibiting the sale of low-quality cars. O B. High-quality sellers could offer warranties or product guarantees. OC. Low-quality sellers could establish industry standards. OD. Itis not possible to solve the asymmetric information problem in this market.

Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling. but buyers do not Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30.000, and a low quality used car is worth $15,000. Based on this probability, the most that a buyer would be willing to pay for a used car is $ 25500. (Enter your response rounded to the nearest dollar.) Which of the following would best "solve" the asymmetric information problem in this market? O A. Prohibiting the sale of low-quality cars. O B. High-quality sellers could offer warranties or product guarantees. OC. Low-quality sellers could establish industry standards. OD. Itis not possible to solve the asymmetric information problem in this market.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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part c, d, and e please
John wants to buy a used car. He knows that there are two types of car in the market, plums and lemons. Lemons are worse quality cars and are more likely to break down than plums. John is willing to pay £10, 000 for a plum and £2, 000 for a lemon. Unfortunately, however, he cannot distinguish between the two types. Sellers can offer a warranty that would cover the full cost of any repair needed by the car for y ∗ years. Considering the type and likelihood of problems their cars can have, owners of plums estimate that y years of guarantee would cost them 1000y, owners of lemons estimate that the cost would be 2000y. John knows these estimates and decides to offer £10, 000 if a car comes with y ∗ years of warranty, £2, 000 if a car comes without warranty. For which values of y ∗ is there a separating equilibrium where only owners of plums are willing to offer the y ∗ -years warranty? Clearly explain your reasoning.
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