Used cars in Poorland sold for about 20 less than new cars of the ...

[sheilaspns]

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]

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

[sheilaspns]

Thanks for the timely response, appreciate it

[olderstudent]

Gracias!