According to the Hotelling Principle, the price of an ...

[Charlie]

According to the Hotelling Principle, the price of an nonrenewable resource
 
  A) falls slowly over time.
  B) falls at a rate equal to the interest rate.
  C) rises at a rate equal to the interest rate.
  D) remains constant over time.

Question 2

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.

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Answer to Question 1

C

Answer to Question 2

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.