Many potential buyers value high-quality used cars at the full information market price of p1 and lemons at p2. A limited number of potential sellers value high quality cars at v1 is less than or equal to p1 and lemons at v2 is less than or equal to p2. Everyone is risk neutral.

The share of lemons among all the used cars that might potentially be sold is .

(a) Under what conditions are all the cars sold? When are only lemons sold? Are there any conditions under which no cars are sold?

(b) Suppose that buyers incur a transaction cost of $200 to purchase a car. This transaction cost is the value of their time to find a car. What is the equilibrium? Is it possible that no cars are sold?