Asymmetric Information

# Asymmetric Information - Asymmetric Information In purely...

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How many lemons can be in the market without crowding out the peaches? Buyer will pay \$2000 for a car only if EV = \$1200 (1-q) + \$2400 q ≥ \$2000 which implies q ≥ 2/3. So if over 1/3 of all cars are lemons, then only lemons are traded. A market equilibrium in which both types of cars are traded and cannot be distinguished by the buyer is a pooling equilibrium . A market equilibrium in which only one of the two types of cars is traded, or both are traded but can be distinguished by the buyers, is a separating equilibrium . What if there is more than two types of cars? Suppose that car quality is uniformly distributed between \$1000 and \$2000, and any car that a seller values at \$x is valued by a buyer at \$(x+300). Which cars will be traded? The expected value of any car to a buyer is \$1500 + \$300 = \$1800. So
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Asymmetric Information - Asymmetric Information In purely...

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