How much is a consumer willing to pay for something described as being a "lemon"?

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Expert Solution

A lemon is a used car that is expected to have developed some defect so that it has been offered for sale in a used car market. When a buyer enter the used car market he is not aware of the quality of the car but he is well aware of the fact that there might be lemons. Generally the buyer is willing to pay a higher price for a good car and a very low price for a lemon.

If the ratio of lemons or the bad quality cars in relation with the good quality cars is not known to the buyer then he will place an expected price on a particular car type assuming it to be 1:1. In case the ratio of the two car types is known, the expected value of his willingness of both the the good car and the lemon is offered to a seller. Suppose that the buyer is willing to pay $1,000 for a good car and $200 for a lemon. In case the ratio of good car versus a lemon is 50/50, the expected price placed by the buyer will be = 1200*0.5 + 100*0.5=$600

Rahul Sunny answered 1 year ago

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