Chapter EMC, Problem 6MCQ

To determine

To state: The option that best describes the reasons for which the used car market has been described as the “market for lemons”.

Answer to Problem 6MCQ

The correct option is a, i.e., information problems make the owners of flawed cars more likely to sell them than the owners of good cars.

Explanation of Solution

The option that best defines the explanations for which the used car market has been defined as the “market for lemons” is information difficulties make the owners of faulty cars more likely to sell them than the proprietors of good cars.

The term which can explain it better is adverse selection.

Adverse selection happens when one person has more knowledge about the way things are than what other people know. Adverse selection happens, for example, when sellers offer items of mainly low quality for sale, and when the people with the maximum need for insurance are those most likely to buy it.