Question

There is so-called Lemon problem in used car market. Regarding it, write down the definition of adverse selection. Also to resolve it, we can use 3rd party’s inspection. Let’s assume we have the following 4 different value used cars. $20,000, $12,000, $6,000, $1,000. Please solve out corresponding inspection fees to separate themselves from each other.

Answer 1

A lemon is a car that is found to be defective after it has been bought. ... Then they are only willing to pay a fixed price for a car that averages the value of a "peach" and "lemon" together (p_avg). But sellers know whether they hold a peach or a lemon.

A lemon is a vehicle (often new) that turns out to have several manufacturing defects affecting its safety, value or utility. Any vehicle with such severe issues may be termed a lemon and, by extension, so may any product with flaws too great or severe to serve its purpose.

So after inspection of third party we can hold or not is decided.