Answer to Question #270610 in Microeconomics for Mehwash Sk

Question

11 1. Recall the lemons problem at the start of the chapter. Some used cars are peaches, worth $3,000 to buyers and $2,500 to sellers, and some are lemons,. worth $2,000 to buyers and $1,000 to sellers. There is a fixed supply of cars and unlimited demand. Suppose there are twice as many peaches as lemons. Assume buyers can't tell the quality of a given car, while sellers can. What do the supply and demand curves look like? In the text, we asserted that markets clear at $2,666.67. Are there other market clearing prices?

 

Answer 1

Two types of cars; lemons and “peaches”. Each lemon seller will accept $1,000; a buyer will pay at most $2500 and each peach seller will accept $2500. A buyer will pay at most $2,400 for peach type of car.