There are many buyers who value high-quality used cars at the full-information market price of p1 and lemons at p2. There are a limited number of potential sellers who value high-quality cars at v1 less than or equals p1 and lemons at v2 less than or equals p2. Everyone is risk neutral. The share of lemons among all the used cars that might potentially be sold is theta. Assume Upper P 1 greater than Upper P 2 comma v 1 greater than v 2 , and there are no transaction costs. Under what conditions are all cars sold?

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25 June, 19:36

There are many buyers who value high-quality used cars at the full-information market price of p1 and lemons at p2. There are a limited number of potential sellers who value high-quality cars at v1 less than or equals p1 and lemons at v2 less than or equals p2. Everyone is risk neutral. The share of lemons among all the used cars that might potentially be sold is theta. Assume Upper P 1 greater than Upper P 2 comma v 1 greater than v 2 , and there are no transaction costs. Under what conditions are all cars sold?

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Brennen · Answer 1

Cars would be sold when P2 > V1,

Explanation:

Given Data

Cars = P1

Lemons = P2

Sellers who value high quality cars = V1 ≤

P1

Sellers who value high quality lemons = V2 ≤ P2

Share of lemons among used cars that might be sold = θ

EP = P1 (θ) + P2 (θ) > V1 > V2

Under which conditions are cars sold

1. Cars would be sold when P2 > V1,

2. Only lemons would be sold when P1 < V1

3. No cars would be sold if P2 is < V1