6. Consider the model of the market for lemons. Suppose that there are two types of used cars, good ones and lemons, and

[answerhappygod]

6. Consider the model of the market for lemons. 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 that are good
cars is g and buyers know this fraction. Let’s suppose that a
seller who has a good car values it at $10,000 and that a seller
with a lemon values the lemon at $4,000. 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,
$12,000 and $5,000, 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) Suppose that you observe that used cars sell for a price of
$10,000. What can you say about the fraction of used cars that are
lemons?
(b) Suppose, instead that the fraction of used cars that are lemons
is g = 0.5. What is the maximum selling price for used cars?