lemons

lemons - Adverse Selection Problems Economics 1 1....

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Adverse Selection Problems Economics 1 1. Residents of the town of Los Carburetors currently own 15 "lemons" and 30 good used cars. A lemon is worth $100 to its current owner and a good car is worth $2,500 to its current owner. The only buyer for used cars is a used car dealer who happens to be a monopolist. The dealer can not tell good cars from lemons when he buys them, but as soon as he buys them and brings them into his shop, he will know. A lemon is worth $600 to the used car dealer and a good car is worth $5,000 to the used car dealer. In order to be able to buy a car from its current owner, the car dealer must pay at least $1 more than its value to its current owner. If the used car dealer offers to buy used cars at a price of $101, how much profits will she make? (a) $7,485 (b) $154,455 (c) $82,455 (d) $1,500 (e) $750 2. Suppose that the monopoly used car buyer in Los Carburetors decides to offer $2,501 for every used car that she buys. How much profits will she make?
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lemons - Adverse Selection Problems Economics 1 1....

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