Question
6. (4 marks) Suppose the used car market in Vancouver this week has many people looking to buy a used car and 500 people willing
6. (4 marks) Suppose the used car market in Vancouver this week has many people looking to buy a used car and 500 people willing to sell their used cars. Used cars are one of two types good cars or lemons. Buyers cannot tell car quality before they buy; each seller knows whether their car is a lemon or a good car. Buyers are willing to pay w dollars for a good car and x dollars for a bad car. Each seller of a good car wants at least y dollars; each seller of a lemon wants at least z > 0 dollars. All buyers are risk neutral. Everybody knows that a fraction g, 0 < g < 1, of the 500 cars are good. Assume w > y > z and w > x > z. Describe each possible equilibrium in this market and the parameter values for which it exists.
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