Asked by Jayden Williams on Jun 14, 2024
Verified
(Scenario: Used-Car Market) Use Scenario: Used-Car Market.If buyers cannot distinguish between lemons and plums,eventually this used-car market will: Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,while cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15,000 and a lemon is worth $3,000.
A) be made up mostly of lemons.
B) have buyers who will have a 50% chance of choosing a plum.
C) be made up mostly of plums.
D) be made up of 50% plums and 50% lemons.
Lemons
A colloquial term in economic theory often referring to products of inferior quality sold because of asymmetric information between buyers and sellers.
Plums
A type of fruit belonging to the genus Prunus, known for its juicy and sweet flesh.
Distinguish
To recognize or point out the differences between two or more things or to identify as distinct.
- Acquire knowledge about the workings of adverse selection and how it influences market activities.
- Investigate the effect of information unevenness on economic activities and the consequences in markets.
Verified Answer
KW
Kindsey WillisJun 17, 2024
Final Answer :
A
Explanation :
If buyers cannot distinguish between lemons and plums, then they will likely be hesitant to pay the higher price for a plum and therefore opt for the cheaper lemon. This will increase the demand for lemons and lead to a market mostly made up of lemons.
Learning Objectives
- Acquire knowledge about the workings of adverse selection and how it influences market activities.
- Investigate the effect of information unevenness on economic activities and the consequences in markets.
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