Case about Asymmetric Information Assume that you are a seller in the used car market. Your...

Case about Asymmetric Information

Assume that you are a seller in the used car market. Your car is a high quality one(plum), but in the market also has bad sellers who sell low-quality cars( lemon)

I will have an incentive to try to convey the fact that I have a good car to the potential purchasers.

Questions: What actions can I do to signal customer that I offer a plum(good quality) rather than a lemon?
Please give me as many actions as you can.ASAP

Expert Solution

Answer

The actions that a plum (good quality) car seller can take to convey the fact that he/she has a good car to the potential purchasers are:

1. Keep the price high. Price should match his expected worth of the car and should not be reduced by the thought that nobody would be willing to buy at such a high price

2. Get a quality check done before hand and provide the "Quality Assurance Certificate" to the potential buyers

3. Provide complete information to the potential buyers (regarding past accidents, repairs etc.)

These checks would assure the potential buyer that you are a high quality seller and not a lemon.

Rahul Sunny answered 2 years ago

Explain why the used car market is both an adverse selection and an asymmetric information problem.

Asymmetric information is the phenomenon where one person (seller or buyer) in a market transaction acts...

Asymmetric information is the phenomenon where one person (seller or buyer) in a market transaction acts on information the other does not have. How did no-doc mortgages, ARMs, and CDOs give evidence of asymmetric information? How did the regulators fail to act to prevent the crisis?

Assume an economy with a car manufacturer, a car seller, and some consumers (there is no...

Assume an economy with a car manufacturer, a car seller, and some consumers (there is no government). The consumers are workers who earn a wage to finance their consumption. In a given year, the car manufacturer produces 200, 000 cars and sells them for $10, 000 per car. The workers’ wages take up 70 percent of the car manufacturer’s revenue. All the materials used for producing cars are imported from other countries at a cost of $1, 000 per car....

Adverse selection occurs in the used car market because: Question 17 options: A) the seller has...

Adverse selection occurs in the used car market because: Question 17 options: A) the seller has more information than the buyer. B) both the buyer and the seller have incomplete information. C) the buyer has more information than the seller. D) Any of these could be the cause of adverse selection in the used car market.

Market Failure Barriers to Entry Asymmetric Information Write one paragraph describing the market failure that you...

Market Failure Barriers to Entry Asymmetric Information Write one paragraph describing the market failure that you were assigned (Barriers to entry, Asymmetric Information). Specifically include the following: (a) how it would distort supply and/or demand (note: it probably only affects supply or demand); (b) how it would affect the quantity of health care used (i.e., does the externality lead to there being too much or too little health care used?); and, how would it affect the price charged relative to...

How can asymmetric information problem be resolved in a competitive market?

In case of an asymmetric demand shock, which "tool" cannot be used ANYMORE by countries that...

In case of an asymmetric demand shock, which "tool" cannot be used ANYMORE by countries that have joined a monetary union?

There are many sellers of used cars. Each seller has exactly one used car to sell...

There are many sellers of used cars. Each seller has exactly one used car to sell and is characterised by the quality of the used car he wishes to sell. The quality of a used car is indexed by θ, which is uniformly distributed between 0 and 1. If a seller sells his car of quality θ for price p, his utility is p − θ2. If he does not sell his car, his utility is 0. Buyers of used...

Assume that a good second-hand car worths $10 to the seller and $12 to the buyer, an ordinary second-hand car worths $7 to the seller and $9 to the buyer, and a bad second-hand car worths $5 to the seller and $3 to the buyer.

Assume that a good second-hand car worths $10 to the seller and $12 to the buyer, an ordinary second-hand car worths $7 to the seller and $9 to the buyer, and a bad second-hand car worths $5 to the seller and $3 to the buyer. Assume that one third of the cars are good, one third are ordinary, and one third are bad.a. If the buyer can tell good or ordinary or bad, will the good cars sell? Will the...

Lemons Market: A buyer and a seller can potentially trade a car of uncertain quality; the...

Lemons Market: A buyer and a seller can potentially trade a car of uncertain quality; the car is equally likely to be a lemon, or a peach. The true value of a lemon is $2,000 and the true value of a peach is $5,000. Buyers buy cars based on their expectation of the true value of cars in the market. Suppose the buyer cannot tell the true quality of the car, but the seller knows the quality of his car....

Question