Asked by Johnny Guittard on Jul 09, 2024
Verified
The "lemons" problem is that
A) cars of verifiable high quality are withheld from the used car market
B) cars of verifiable low quality are withheld from the used car market
C) cars of unverifiable high quality are withheld from the used car market
D) cars of unverifiable low quality are withheld from the used car market
Lemons Problem
A market problem where the quality of goods cannot be accurately determined by the buyer due to asymmetric information, leading to an overall decline in product quality.
- Understand potential solutions to mitigate the "lemons" problem in markets.
Verified Answer
SG
Shomi GhoshJul 11, 2024
Final Answer :
C
Explanation :
The "lemons" problem refers to the information asymmetry that arises when buyers of used cars cannot determine the true quality of the vehicle they are purchasing. As a result, sellers of cars of unverifiable high quality may choose to withhold them from the market, leading to a market dominated by lower quality vehicles (or "lemons"). This is also known as "adverse selection."
Learning Objectives
- Understand potential solutions to mitigate the "lemons" problem in markets.
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