Consider a market for used cars. Suppose there are only two kinds 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 kind of cars (lemons, good cars, or both) are traded? 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. Thus the market for used cars is a market for lemons. Economists call the problem that buyers of used cars face adverse selection.
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Based on the figure below. Starting from long-run equilibrium at point C, a tax cut that increases aggregate demand from AD to AD1 will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________, if left to self-correcting tendencies.
A. D; C B. B; C C. B; A D. D; B
Along a supply curve,
A. supply changes as price changes. B. quantity supplied changes as price changes. C. supply changes as technology changes. D. quantity supplied changes as technology changes.
Tampering with the price mechanism
A. can be efficient for a while. B. cannot be attempted in a market economy. C. can enhance societal welfare if done properly. D. often produces undesired side effects.
When inflation increases at a ________ rate, the money someone holds will ________ every day
A) high; buy more B) high; buy less C) low; buy less D) low; buy more