There are 2 types of used cars available at dealerships: good cars and lemons (which break down often). – The fraction o
Posted: Fri Jul 01, 2022 7:56 am
There are 2 types of used cars available at dealerships: goodcars and lemons (which break down often). –
The fraction of lemons at a dealershipis λ.
Note that Dealers do not publiclydistinguish good cars versus lemons; they sell what’s on the lot atthe sticker price.
Buyers cannot tell apart good cars andlemons. But they know that some fraction (percentage) λ ∈ [0,1] of cars are lemons. – After buyers have owned the car for anyperiod of time, they also can tell whether or not they have boughta lemon. –
Assume that good cars are worth $20,000 to buyers
Assume that lemons are worth $10, 000to buyers.
For simplicity (and without loss ofgenerality), assume that cars do not deteriorate and that buyersare risk neutral.
As a Result, the Pcars = (1 −λ) · 20, 000 + λ · 10, 000
(a requires numerical answers—to beclear, I need to be given the numbers)
The fraction of lemons at a dealershipis λ.
Note that Dealers do not publiclydistinguish good cars versus lemons; they sell what’s on the lot atthe sticker price.
Buyers cannot tell apart good cars andlemons. But they know that some fraction (percentage) λ ∈ [0,1] of cars are lemons. – After buyers have owned the car for anyperiod of time, they also can tell whether or not they have boughta lemon. –
Assume that good cars are worth $20,000 to buyers
Assume that lemons are worth $10, 000to buyers.
For simplicity (and without loss ofgenerality), assume that cars do not deteriorate and that buyersare risk neutral.
As a Result, the Pcars = (1 −λ) · 20, 000 + λ · 10, 000
(a requires numerical answers—to beclear, I need to be given the numbers)