Microeconomics · free preview
The Market for Lemons
When sellers know quality and buyers cannot tell, buyers price the average, good cars withdraw, the average worsens, and the market can unravel to lemons only.
1. Knowledge is not shared
Knowledge is not shared
2. The spiral
The spiral
3. The countermeasures
The countermeasures
4. Where you see it
Where you see it
5. The unraveling step
Buyers cannot distinguish good used cars from lemons. Good cars are worth 10 to buyers and 8 to their owners, lemons 4 and 2. If half the cars are good, what price will uninformed buyers offer, and what happens next?
6. Fighting the spiral
Why does a warranty help sell a good used car at a fair price?
7. The average value
Good cars are worth 9 thousand to buyers and 7 to owners, lemons 3 and 1. Buyers believe one quarter of cars for sale are lemons. Compute the price buyers will offer, in thousands, and write the number.
8. The spiral's next step
Buyers cannot distinguish good cars from lemons, so they pay an average price. Good-car owners start withdrawing. What happens next?
9. The countermeasure's logic
Why does a warranty help a good used car sell at a fair price?
10. A different mix
Good cars are worth 8 thousand to buyers and lemons 2 thousand, and buyers believe one third of the market is lemons. Compute the price buyers will offer, in thousands, and write the number.
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