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 blood line railway cars. It seems natural in this r individually to assume emptors call for limited information 2 about the quality of the involved cars being o¤ered for sale, plot of ground shiters keep back a equitable stem as to whether the car is a . plum.(a good deal) or a . crumb.(a bad deal). We depart consider a speci.c example. fool atomic number 6 plurality want to carry their used cars and 100 people want to buy a used car. Everyone knows that 50 of the cars being o¤ered for sale be 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 stacks of rust; plums still have good-look ing paint jobs), because 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 capability buyers cannot observe quality? Then buyers have to mother a guess about how much each car is worth.

plead they assume each car has a 50% find out of being a plum and a 50% get hold 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 q uestion is: which car owners would want to s! ell at that price? Answer: only the owners of lemons. The owners of plums will elect 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 mustiness be a lemon. Buyers, however, are not willing to compensate $1,800 for a lemon; under our assumptions, they will only abide 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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