The following question deals with the lemon problem and its effect on asset pricing.
a. You are in the market for a used car. You know that the book value for the cars you are looking at is in the range 20,000 to 24,000. If you believe the dealer knows as much about the car as you, how much are you willing to pay? Explain.
b. You are in the market for a used car. You know that the book value for the cars you are looking at is either 20,000 or 24,000 with a probability of 50:50. If you believe the dealer knows as much about the car as you, how much are you willing to pay? Explain.
c. Now, you believe the dealer knows more about the cars than you do. How much are you willing to pay? Explain. [Note this is a follow up question to b.].
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The following question deals with the lemon problem and its effect on asset pricing.
a. You are in...
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