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Consider the market for used cars. The overall population of used cars is a fraction p...

Consider the market for used cars. The overall population of used cars is a fraction p plums and a fraction (1 ? p) lemons. Used car sellers value plums at $2,000 and lemons at $1,000. Used car buyers value plums at $2,400 and lemons at $1,200. There is asymmetric information. The seller of a car knows the type of the car and the potential buyer does not. Market equilibrium is defined as a Nash equilibrium.

1) Suppose p = 0.5. What is the market equilibrium price. What kinds of cars are traded in the equilibrium? (Nash equilibrium)

2) Suppose p = 0.8. What are the possible market equilibria (Nash equilibria)? What kinds of cars are traded in the equilibria? (hint: it is on purpose that the question uses the plural for possible equilibria).

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