Activity A Market For Lemons, perfect information Suppose that the market for used cars is composed of high quality cars and lemons. The valuations ofthe buyers and sellers for each quality is given in the table below: Good car (80%) Lemon (20%) Seller's valuation 10 4 Buyer's valuation 16 6 When quality is observable to all, what price(s) would generate trade of good cars? How much welfare would be generated by the sale ofa good car? Repeat the same for lemons. Activity B Market for Lemons, asymmetric information Pooling Suppose now quality is only observable to sellers. Assume all sellers are willing to sell their car. 0 How much a buyer be willing to pay to for a car of unknown quality? a At this price, are all sellers willing to sell their car? Activity C Market for Lemons, asymmetric information Separating Assume only owners of lemons are willing to sell their car, while high quality owners prefer not to. o How much a buyer be willing to pay to for a car of unknown quality? 0 At this price, are sellers of high quality cars happy not to put their car on sale? Activity D - Market for Lemons, asymmetric information Pooling 2 Suppose now that only 20% of cars are good quality (80% lemons). Assume all sellers are willing to sell their car. a How much a buyer be willing to pay to for a car of unknown quality? Activity E Market for Lemons, asymmetric information Separating 2 Assume only owners of lemons are willing to sell their car, while high quality owners prefer not to. o How much a buyer be willing to pay to for a car of unknown quality? 0 At this price, are sellers of high quality cars happy not to put their car on sale