Suppose There Are Only Two Kinds of Cars in the Market

question 50

Multiple Choice

Suppose there are only two kinds 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 equilibrium price of a used car?

• A) $8,000
• B) $1,000
• C) $4,500
• D) $9,000
• E) The equilibrium price depends on how many lemons and how many good cars are traded.

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Definitions:

Commission Salesman

A salesperson who earns income based on the percentage of sales they generate.

Model Year

A reference to the marketed annual iterative period in which a vehicle or product is sold under a particular designation differing from the calendar year.

Bargaining Position

The leverage or advantage one party has in negotiations, influenced by factors such as information, alternatives, and urgency.

Sequential Game

A strategic game where players make decisions one after another, with each player typically informed of the previous players' decisions before making their own.