37.11. 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.
37.16.
Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the
4,000 used cars on the market is such that the number of used cars of value
less than V is V/2 . Original owners must sell their used cars. Original owners
know what their cars are worth, but buyers can’t determine a car’s value until
they buy it. An owner can either take his car to an appraiser and pay the
appraiser $400 to appraise the car (accurately and credibly) or sell the car
unapprised. In equilibrium, car owners will have their cars appraised if and
only if their value is at least
a. $400.
b. $2,000.
c. $1,200.
d. $800.
e. $1,600.