The market for used cars is shown in the above figure. Buyers ...

[NguyenJ]

Thanks

[otokexnaru]

Welcome

[jparksx]

The market for used cars is shown in the above figure. Buyers cannot tell whether any given car is a lemon. Ten percent (10%) of all cars are lemons. Which of the following statements is TRUE?
◦ Buyers of lemons will pay too much for their cars.
◦ Only lemons are sold for $1,000.
◦ Only lemons are sold for $1,900.
◦ Buyers of good cars will pay too much for their cars.

[ally]

Buyers of lemons will pay too much for their cars.

[B]

The market for used cars is shown in the above figure. Buyers cannot tell whether any given car is a lemon. What is the maximum share of lemons that will still allow for all cars being sold?
◦ 12%
◦ 16%
◦ 23%
◦ 20%

[Jayson]

20%

[B]

Thanks

[Jayson]

Welcome

[cherise1989]

The market for used cars is shown in the above figure. Buyers cannot tell whether any given car is a lemon. The percent of all cars that are lemons is θ. What value of θ is necessary for all cars to be sold?

[nothere]

The sellers of good cars have a reservation price of $1,800. Setting $1,800 equal to the expected value of a car yields 1800 = (θ ∗ 1,000) + ((1 - θ) ∗ 2,000) = 2,000 - (θ ∗ 1,000). So, θ = 20%. Thus, if θ ≤ 20%, all cars will be sold.