Unformatted text preview: obtains a lemon the value of the car to him is $8,000. a. Suppose neither the seller nor the buyer knows the type of the car, but they know that half of the cars are lemons and half are peaches. Assume that the seller makes a take-it-or-leave-it offer to the buyer. What offer would the seller make? Which cars would be traded on the market? b. Now, suppose that each seller knows the true quality of their car, but buyers do not. Suppose also that p is the percentage of sellers who own a peach and that sellers each make a take-it-or-leave-it-offer. What is the lowest value of p so that there is an equilibrium where both peaches and lemons are traded on the market?...
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This note was uploaded on 03/13/2009 for the course ECON 398 taught by Professor Emre during the Spring '07 term at University of Michigan.
- Spring '07