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Assume there are two players, a buyer and a seller of a used car. The seller knows whether the car is a good car or a lemon and the buyer knows the probability distribution of good cars and lemons. Assume the probability of a good car is 70 percent and the probability of a lemon is 30 percent. Assume that both buyers and sellers have identical tastes and there are only two types of cars. Good cars have a quality value of $20,000 and lemons have a quality value of $10,000.
a. Under perfect information where there is no informational asymmetries, which car is sold for how much?
b. What is the expected value of a car? Given this information, how will the buyer be informed whether the car is a lemon or not?
c. What would the Akerlof lemons model predict to be the final outcome of this game? In other words, which cars will be sold and for how much? Explain.
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this only needs to be four paragrapghs. nbspresources need to be from an online source no books. and the website
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