In Rustbucket, Michigan, There Are 200 Used Cars for Sale

question 5

Multiple Choice

In Rustbucket, Michigan, there are 200 used cars for sale, half of them are good and half of them are lemons.Owners of lemons are willing to sell them for $500.Owners of good used cars are willing to sell them for prices above $900 but will keep them if the price is lower than $900.There is a large number of potential buyers who are willing to pay $700 for a lemon and $1,900 for a good car.Buyers can't tell good cars from bad, but original owners know.

• A)There will be an equilibrium in which all used cars sell for $1,300.
• B)The only equilibrium is one in which all used cars on the market are lemons and they sell for $700.
• C)There will be an equilibrium in which lemons sell for $500 and good used cars sell for $900.
• D)There will be an equilibrium in which all used cars sell for $700.
• E)There will be an equilibrium in which lemons sell for $700 and good used cars sell for $1,900.

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Definitions:

Law of Diminishing Returns

An economic principle stating that if one factor of production is increased while others are held constant, the overall return will eventually decrease after a certain point.

Financing R&D

The process of providing funds for research and development activities, typically to develop new products, services, or technologies.

Marginal Cost

The extra outlay required to produce one more unit of a product or service.