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| a. Suppose that buyers recognize that the chance of getting a lemon is 50%, but are unable to tell whether a car is a lemon or a plum. What is the expected value of a used car to a buyer? b. If the market works to the extent that prices reflect the expected value of a used car, how many high-quality automobiles will be offered for sale at the price determined in (a)? How many low-quality automobiles will be offered for sale? Of the automobiles offered for sale, what is the proportion of low-quality automobiles? c. Compared to a market with perfect information, what kind of deadweight loss does the information loss generate in the market for high-quality used cars? Is there a deadweight loss in the market for lemons, too? |
