Short Answer
Calculating Market Viability with Hidden Information
In a used car market, 100 cars are available. 50 are high-quality ('plums'), valued by buyers at $10,000 each. 50 are low-quality ('lemons'), valued by buyers at $4,000 each. Buyers cannot tell the quality of any given car before purchase. Sellers of plums will only accept a price of $8,000 or more, while sellers of lemons will accept $2,000 or more. Based on this information, calculate the maximum price a risk-neutral buyer would offer for a car and explain which type(s) of cars will ultimately be traded in this market.
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Updated 2025-08-21
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