Adverse selection occurs when unobservable qualities are mis-valued because of a

Question

Adverse selection occurs when unobservable qualities are mis-valued because of a lack of information. This is often called a lemons market. How much is a consumer willing to pay for a used car that could be either a lemon or a plum? To determine a consumer’s willingness to pay in a mixed market with both lemons and plums.

1- What is a lemons market? Why is it called this?

2. How much is the consumer willing to pay for a plum?

3. How much is the consumer willing to pay for a lemon?

4. What is the chance that a used car purchased in the mixed market will be of low quality?

5.   In a market with asymmetric information, there are strong incentives for buyers and sellers to solve the lemons problem. Discuss.

This is the only information that I received, there was no numbers or facts presented to me.

Explanation / Answer

2. How much is the consumer willing to pay for a plum?

3. How much is the consumer willing to pay for a lemon?

4. What is the chance that a used car purchased in the mixed market will be of low quality?

5.   In a market with asymmetric information, there are strong incentives for buyers and sellers to solve the lemons problem.

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