Suppose That in a Market for Used Cars,there Are Good

question 118

Multiple Choice

Suppose that in a market for used cars,there are good used cars and bad used cars (lemons) .Consumers are willing to pay as much as $6,000 for a good used car but only $1,000 for a lemon.Sellers of good used cars value their cars at $5,000 each and sellers of lemons value their cars at $800 each.Buyers cannot tell if a used car is reliable or is a lemon.Based on this information,what is the likely outcome in the market for used cars?

• A)Both good used cars and lemons will sell for $4,500 each.
• B)Only lemons will sell,for $800 each.
• C)Both good used cars and lemons will sell for $1,000 each.
• D)Most used cars offered for sale will be lemons.

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Definitions:

Eugene Fama

An American economist and Nobel laureate known for his work on the efficient-market hypothesis.

Risk-Adjusted Performance

A measure of how much risk is involved in producing a financial return, used to compare the performance of investment portfolios.

Comparison Universe

A benchmark or pool of investments used to evaluate the performance of a specific investment or portfolio.

Mutual Funds

Professionally managed investment initiatives that are bankrolled by stockholders and trade across assorted holdings.