Question

There are 200 used cars for sale, half of them are good and half of them are lemons. Owners of lemons are willing to sell them for $500. Owners of good used cars are willing to sell them for prices above $900 but will keep them if the price is lower than $900. There is a large number of potential buyers who are willing to pay $700 for a lemon and $1,900 for a good car. Buyers can’t tell good cars from bad, but original owners know. Determine all equilibrium prices.

Answer 1

There are 100 good cars and 100 lemons. Selling price of lemons is minimum $500 and for good used cars the selling price is minimum $900.

Buyers are willing to pay $700 for a lemon and $1,900 for a good car. Buyers cant tell good cars from bad so they place an expected price over a certain car which is 0.5*700 + 0.5*1900 = $1300. Now when buyers are willing to pay $1300, both types of sellers are willing to sell their cars and so all cars will be sold at this price.