Please assist me in solving this problem. Please explain too. 4. There are 100 u

Question

Please assist me in solving this problem. Please explain too.

4. There are 100 used cars whose owners might want to sell them: 80 are plums and 20 are lemons. The sellers and buyers have the following valuations for the cars Lemons Plums Seller's value 12,000 22,000 Buyer's value 15,000 25,000 The sellers know whether their car is a plum or a lemon, but the buyers do not. The buyers are assumed to know (a) the fraction of lemons in the population of cars and (b) whether the plums are being offered for sale at the prevailing price (i) Explain why the owners of plums may decide not to sell their cars.? (ii) Suppose that both lemons and plums are offered for sale by their owners. Is there a market clearing price at which this would be an equilibrium strategy?

Explanation / Answer

i) Owner of plum may decide to not sell the car because ower knows that it is plum but buyer does not know. and the value for plum by buyer is 25000 which is more than the value of the seller which is at 22000. So, it is highly posible that buyer may think the car to be lemon and hence decrease the value to 15000. It is highly possible that the seller of plum will be misundertood as the seller of lemon and the value that will be offfered by buyer will be less than that of the plum.

ii) the market clearing price for lemon should be average od 12000 and 15000 that is equal to 13500.

and for peach it will be average of 22000 and 25000 that is equal to 23500.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---