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Assume that the seller knows the quality and the value of a used good but that the buyer does not. Assume that the seller knows

    1. Assume that the seller knows the quality and the value of a used good but that the buyer does not. Assume that the seller knows his product is of bad quality. Assume that this good, if in good quality, is worth 10,000 (for the seller and the buyer) and if it is in bad shape, is worth only 1,000 (for the seller and the buyer).

    1. Now assume that most of the units on the used market are good quality. What has to be the minimum proportion of good quality products in the market such that the seller can obtain 6,000 for his good?

    1. Take the probability that you have just calculated. Assume now that buyers’ valuations can be different from that of the sellers. What has to be the buyers’ valuations for the high and low-quality products such that with the probability you calculated above, only lemons (bad quality goods) will be offered on the used market?
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