(3) Laws to prevent opportunism: Product liability laws protect consumers from non-functional or dangerous products. (4) Third party comparison: Some organizations publish expert comparison of brands which helps consumers to avoid lemons.
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Consider a market for used fridges where sellers know product quality but buyers do not. Good fridges are worth $600 and poor fridges $300 to buyers. Owners of good fridges would be willing to accept $400 or more while owners of poor fridges would accept $200 or more. Both buyers and sellers are risk neutral. a)If the proportion of good and bad are 50-50, then all fridges are sold at $450 at equilibrium. b)If only 10% of available fridges are good, then there is an adverse selection problem. c)Both a and b. d)None. Quiz