There are two types of used cars on the market: Lemons and Cherries. Lemons are

Question

There are two types of used cars on the market: Lemons and Cherries. Lemons are worth $2000 to sellers and $3000 to buyers. Cherries are worth $4000 to sellers and $6000 to buyers. There are 70 Lemons and 30 Cherries available for sale, and buyers are aware of these numbers. However, buyers cannot tell Lemons apart from Cherries, while sellers know the type of the car they are selling. If a seller does not receive at least the amount the car is worth, he/she will take that car off the market. Buyers will anticipate this and adjust their offered prices accordingly. What is the total surplus generated from used cars? Now assume buyers can tell lemons from cherries what is the total surplus generated from used cars?

Explanation / Answer

Suppose all 100 cars are offered in the market. Hence 70% are lemons and 30% are cherries. The valuation of a car to a buyer will be 70%

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