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| In Problem 1, we discovered that imperfect information about the quality of used cars caused fewer plums and more lemons to be offered for sale. Thinking in discrete steps, a. How does this revision of the expected value affect the proportion of lemons to plums offered for sale by sellers? b. How does the change in the proportion of lemons to plums affect buyers’ willingness to pay for a used car? c. How does the changing market price (buyers’ willingness to pay) affect the quantity of plums and the quantity of lemons offered for sale? d. Briefly describe the logical conclusion of this feedback process. |
