Question

In: Economics

Suppose in a used car market, owners of lemons are willing to accept $3000 for their cars and owners of a peaches are looking for a price above $12500.

Suppose in a used car market, owners of lemons are willing to accept $3000 for their cars and owners of a peaches are looking for a price above $12500. Buyers are willing to pay up to $18000 for a peach and $8000 for a lemon. What price would buyers be willing to pay for a car of unknown type if the ratio of peaches is f =0.6? What is the minimum f for peaches so that the market for peaches does not collapse?

Solutions

Expert Solution

If the ratio of peaches is 0.6 , the ratio of lemons is 0.4
THe price buyers would be willing to pay for unknown type
= 0.6 * 18000 + 0.4 * 8000
= 10800+3200
= 14000 $

For the market to not collapse , the buyers should be willing to pay at least 12500 for unknown types
Let x be the minimum f for peaches

x* 18000 + (1-x) * 8000 = 12500
18000 x + 8000 - 8000x = 12500
10000 x = 4500
X =0.45

THe minimum f for market to not collapse is 0.45

Rahul Sunny answered 2 years ago
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