Author Question: Used cars in Poorland sold for about 20 less than new cars of the same model manufactured in the ... (Read 79 times)

sheilaspns · **on:** Jun 29, 2018

Used cars in Poorland sold for about 20 less than new cars of the same model manufactured in the same year. However, price differences were reduced when certified used-car dealers entered into the market for used cars in Poorland.

What explains this phenomenon?

Question 2

Which of the following best reflects an increase in quantity demanded and not an increase in demand?

A) A college expects enrollment to increase, despite no change in the tuition.
B) Skiing becomes a fashionable winter sports activity.
C) The price of hair stylings falls.
D) Consumers expect lower prices next month for computers.

meryzewe · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Used cars usually sell for less when compared to new cars manufactured in the same year because buyers are worried about the quality of used cars; only the sellers know about the true quality of a used car. Therefore, they are not willing to pay as much for a used car as they are for a new car. This is exactly what happened in Poorland before the entry of certified used-car dealers in the market. However, when certified used-car dealers entered into the market, buyers had better information about the quality of the cars and therefore, were willing to pay more for good-quality cars. This is an example of signaling.

Answer to Question 2

C