1) Assume the market for used cars is set up as in the table below. There are two types of cars: lemons and peaches. Peaches are more reliable than lemons and thus have a higher value to both buyers and sellers. Sellers know the quality of their cars, but buyers cannot distinguish between the two. Buyers are risk neutral and only care about the average quality of the cars on the market. Assume that the seller has more bargaining power and cars will sell at the buyer's value. Everyone has the information in the table, but the buyers only know the percentage of cars that are lemons.

Perfection information prices Peach (reliable) Lemon (unreliable) Buyer's value 530,000 $20,000 Seller's value $26,000 $16,000