Suppose There Are Only Two Kind of Cars in the Market

question 118

Multiple Choice

Suppose there are only two kind of cars in the market for used cars: lemons and good cars. A lemon is worth $1,000 both to its current owner and to anyone who buys it. A good car is worth $8,000 to its current and potential owners. Buyers can't tell whether a car is a lemon until after they have bought the car, and there is no warranty. What is the prevailing price of a used car?

• A) $8,000
• B) $1,000
• C) $4,500
• D) The prevailing price depends on how many lemons and how many good cars are traded.