In Akerlof's model of the market for lemons, there are sellers and buyers.Sellers initially own all the cars.They demand at least $q of compensation in order to sell a car of quality level .Buyers, on the other hand, initially own no cars.They are willing to pay for a car of quality level .

The quality of any given car is a random variable drawn from a uniform distribution ranging from the minimum level of quality in the population of cars, , to the maximum level of quality, .Using the formula for the expected value of a uniformly distributed random variable, we can be sure that the expected quality of any given car is equal to , where .

Let p > 0 be the price of used cars put up for sale by sellers in equilibrium.Sellers know the quality of cars they are selling, but Buyers only know the average quality of cars on the market.

A.Let q₁ = 0 and q₂ = 2.

a.If every car is sold, what is a buyer willing to pay for each car?

b.Will the sellers choose to sell all their cars?

c.Given your answers above, which types of cars will sell in this market, if any?

B.Let q₁ = 0 and q₂ = 4.

a.If every car is sold, what is a buyer willing to pay for each car?

b.Will the sellers choose to sell all their cars?

c.Given your answers above, how many cars will sell in this market, if any?

d.Does raising the maximum quality of cars (i.e., ) that sellers possess have any effect on the predictions of the model?Explain why or why not.

C.Let q₁ = 1 and q₂ = 2

a.If every car is sold, what is a buyer willing to pay for each car?

b.Will the sellers choose to sell all their cars?

c.Given your answers above, how many cars will sell in this market, if any?

d.Does raising the minimum quality of cars (i.e., ) that sellers possess have any effect on the predictions of the model?Explain why or why not.