What is the expected outcome from a used car market that is subject to the lemon
ID: 1207075 • Letter: W
Question
What is the expected outcome from a used car market that is subject to the lemons problem?
Many plums, higher price
Many plums, lower price
Fewer plums, higher price
Fewer plums, lower price
2. What is the key limitation in a market that is subject to the lemons problem?
Asymmetric information (buyers have less info)
Asymmetric information (sellers have less info)
Moral hazard
3.Suppose used auto buyers expect half of the cars in the market to be plums and half to be lemons. However, at the current price, only 20 percent of the cars available for sale on the market are plums. Is this market in equilibrium at this current price?
Yes
No
4.The number of store visits that buyers make while searching for goods tends to increase with:
Higher price
Higher income
Question 5
What do economists call the market outcome in which market participants with less information face an undesirable set of choices?
Adverse selection
Free riders
Moral hazard
External costs
A.Many plums, higher price
B.Many plums, lower price
C.Fewer plums, higher price
D.Fewer plums, lower price
Explanation / Answer
Q1. When a used car market is subject to lemons problem the this results in driving out of good quality used cars from market and only bad-quality used cars remain in market which in result lower the average price.
Thus, the expected outcome from a used car market that is subject to the lemons problem is fewer plums, lower price.
Hence, the correct answer is option (D).
Q2. The key limitation in a market that is subject to the lemons problem is the asymmetric information that is buyers are uncertain about the quanlity of product due to lack of information.
Hence, the correct answer is option (A).
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