Author Question: Explain why bad cars drive out the good ones in the market for used cars. What will be an ideal ... (Read 82 times)

Caiter2013 · **on:** Jun 29, 2018

Explain why bad cars drive out the good ones in the market for used cars.

What will be an ideal response?

Question 2

A ________ is owned by its stockholders.

A) sole proprietorship B) partnership
C) corporation D) All of the above are correct.

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

Answer to Question 1

Suppose there are two kinds of cars available in the used car market: high-quality cars (peaches) and low-quality cars (lemons). All cars look exactly the same but there is asymmetric information; only the seller actually knows whether he has a lemon or a peach. If both peaches and lemons are available, buyers would not be willing to offer a very high price for a used car because there is a chance they are buying a lemon. The owners of peaches might be unwilling to sell at this price and so in equilibrium only lemons are bought and sold.

Answer to Question 2

C