Answer Happy

Consider the model of the market for lemons from Chapter 22.
Suppose that there are two types of used cars — good 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 21 and buyers know this. Let’s suppose that a
seller who has a good car values it at $10,000 and a seller with a
lemon values the lemon at $5,000. 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 and lemons are
$14,000 and $8,000, 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? Briefly explain.
(b) Is there an equilibrium in the used-car market in which only
lemons are sold? Briefly explain.