suppose that 70% of sellers have low-quality cars. assume buyers know that 70% of sellers have low-quality cars but are unable to determine the quality of individual cars. If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected value of a car to a buyer is (Hint: The expected value of a car is the sum of the probability of getting a low-quality car multiplied by the value of a low-quality car and the probability of getting a high-quality car multiplied by the value of a high-quality car.)
Suppose buyers are willing to pay only up to the expected value of a car that you found in the previous question.
Since sellers of low-quality cars are willing to sell for $4,500, while sellers of high-quality cars are willing to sell for $8,500, will be willing to participate in this market at that price.
The dilemma in this problem is an example of which of the following economic concepts?
O Moral hazard
O Adverse selection
O Screening
O Signaling
