Answer:
a. What will be the market price for a Civic? Which cars will be traded?
- market price = $6,400
- all cars would be traded since the market price exceeds the selling price of peaches (and lemons).
b. What will be the market price for a Civic in month 1? Which cars will be traded?
- market price = $6,080
- all cars would be traded since the market price exceeds the selling price of peaches (and lemons).
c. What will be the market price for a Civic in month 2? Which cars will be traded?
- market price = $5,760
- only lemons would be traded since the market price exceeds the selling price of lemons but not peaches.
Explanation:
month 0
buyers expected cost:
peaches $8,000 x 60% = $4,800
lemons $4,000 x 40% = $1,600
total expected cost = $6,400
sellers expected price:
peaches $6,000
lemons $4,000
month 1
buyers expected cost:
peaches $7,600 x 60% = $4,560
lemons $3,800 x 40% = $1,520
total expected cost = $6,080
sellers expected price:
peaches $5,900
lemons $3,900
month 2
buyers expected cost:
peaches $7,200 x 60% = $4,320
lemons $3,600 x 40% = $1,440
total expected cost = $5,760
sellers expected price:
peaches $5,800
lemons $3,800
