In Rustbucket, Michigan, there are 200 used cars for sale; half of these cars are good and half of them are lemons.Owners of lemons are willing to sell them for $100.Owners of good used cars are willing to sell them for prices above $1,500 but will keep them if the price is lower than $1,500.There is a large number of potential buyers who are willing to pay $300 for a lemon and $1,900 for a good car.Buyers can't tell good cars from bad, but original owners know.

A) There will be an equilibrium in which all used cars sell for $1,100.
B) The only equilibrium is one in which all used cars on the market are lemons and they sell for $300.
C) There will be an equilibrium in which lemons sell for $100 and good used cars sell for $1,500.
D) There will be an equilibrium in which all used cars sell for $800.
E) There will be an equilibrium in which lemons sell for $300 and good used cars sell for $1,900.

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Gurpreet Singh · Accepted Answer

Final Answer : B, Explanation :  Given the information, the market will experience a lemons problem, where asymmetric information leads to only lemons being sold at their perceived value ($300) because buyers cannot differentiate between good cars and lemons. Good cars will not be sold since their owners value them more ($1,500) than what buyers are willing to pay without being able to distinguish between good cars and lemons.

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