lemons

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

This preview shows pages 1–2. Sign up to view the full content.

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?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 3

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online