Practice Questions

2. Consider a market in which 90 people would like to sell their used cars. Out of these cars, 30 are good, 30 are in moderate shape, and 30 are bad. Each seller values a good car at 7,000, a moderate car at 3,000, and a bad car at 0. There are many people interested in buying these cars, so sellers have all the bargaining power. Each potential buyer is willing to pay up to 10,000 for a good car, 6,000 for a moderate car. and 2,000 for a bad car. a) Suppose that both buyers and sellers can observe the quality of each car before they trade. How many cars would be sold and at what prices? b) Now suppose that buyers cannot distinguish between good, moderate and bad cars although sellers know the quality of their cars. How many cars would be sold and at what prices