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:

Product Differentiation

The process of distinguishing a product or service from others in the market to make it more attractive to a particular target market.

Perceptual Map

is a visual tool used in marketing to display the position of a brand or product in the minds of consumers relative to competitors.

Minds of Adults

The cognitive processes, understanding, and psychological aspects characteristic of adult individuals.

Market Segmentation

The process of dividing a broad consumer or business market into sub-groups of consumers or segments based on shared characteristics.