Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of
Question:
Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they areselling, but buyers do not.
Buyers know that there is a 50% chance of getting a"lemon", a low quality used car. A high quality used car is worth$30,000, and a low quality used car is worth$15,000.
Based on thisprobability, the most that a buyer would be willing to pay for a used car is $22,500. (Enter your response rounded to the nearestdollar.)
Which of the following would best"solve" the asymmetric information problem in thismarket?
A. High-quality sellers could offer warranties or product guarantees.
B. Prohibiting the sale oflow-quality cars.
C. Low-quality sellers could establish industry standards.
D. It is not possible to solve the asymmetric information problem in this market.