Consider a market for used cars. Suppose there are only two kind of cars: lemons and good cars. A lemon is worth $1,500 both to its current owner and to anyone who buys it. A good car is worth $6,000 to its current and potential owners
Buyers can't tell whether a car is a lemon until after they have bought the car. What do economists call the problem that buyers of used cars face? What is the price of a used car? Explain and substantiate your answer.
Because buyers can't tell the difference between a lemon and a good car, they are willing to pay only one price for a used car. And they are not willing to pay $6,000 since there is some probability that they are buying a lemon worth only $1,500. If buyers are not willing to pay $6,000 for a used car, the owners of good cars are not willing to sell them: their car is worth $6,000 to them. So only the owners of lemons are willing to sell. But if only the owners of lemons are selling, all the used cars available are lemons, so the maximum price worth paying is $1,500. Thus the market for used cars is a market for lemons, and the price of a used car is $1,500. Economists call the problem that buyers of used cars face adverse selection.
You might also like to view...
When taxes paid by a check are deposited in tax and loan accounts,
A) bank reserves and the money supply are unaffected. B) bank reserves fall but the money supply is unaffected. C) bank reserves are unaffected but the money supply falls. D) bank reserves and the money supply fall.
Some, but not all, government economists are employed within the administrative branch of government. Which of the following government agencies employs economists outside of the administrative branch?
a. the Department of Labor b. the Department of the Treasury c. the Congressional Budget Office d. the Council of Economic Advisers
If there are 1,000 people, each of whom owns a $100,000 house, and they each stand a 1/1,000 chance each year of suffering a fire that will totally destroy their house, what is the minimum that they would have to pay annually for fire insurance?
What will be an ideal response?
If a firm is hiring variable resources D and F in perfectly competitive input markets, it will minimize the cost of producing any level of output by employing D and F in such amounts that:
A. the price of each input equals its MP. B. MP D = MP F . C. MP D /P D = MP F /P F . D. MP D /P F = MP F /P D