3. Consider the model of the market for lemons. Suppose that there are three types of used cars: good ones, medium ones

[answerhappygod]

3. Consider the model of the market for lemons. Suppose that
there are three types of used cars: good ones, medium ones and
lemons, and that sellers know which type of car they have. Buyers
do not know which type of car a seller has. The fraction of used
cars of each type is 31 and buyers know this. Let’s suppose that a
seller who has a good car values it at $8,000, a seller with a
medium car values it at $5,000 and a seller with a lemon values the
lemon at $1,000. A seller is willing to sell his car for any price
greater than or equal to his value for the car; the seller is not
willing to sell the car at a price below the value of the car.
Buyers values for good cars, medium cars and lemons are, $9,000,
$8,000 and $4,000, respectively. As in Chapter 22 we will
assume
that buyers are risk-neutral; that is, they are willing to pay
their expected value of a car.
(a) Is there an equilibrium in the used-car market in which all
types of cars are sold? Explain briefly.
(b) Is there an equilibrium in the used-car market in which only
medium quality cars and lemons are sold? Explain briefly.
(c) Is there an equilibrium in the used-car market in which only
lemons are sold? Explain briefly.