Problem
Suppose it is a well-known fact that among ten-year old Ford F-150s, half the trucks are good and half of them are lemons. Suppose that it is also known to all parties that a good truck is worth $8,000 to current owners and $10,000 to potential buyers. A bad truck, on the other hand, is only worth $1,000 to current owners and $2,000 to potential buyers.
Throughout, assume that buyers are risk-neutral.
1) Suppose that the quality is not only known to current owners, but can also be easily and correctly ascertained by potential buyers. Will a good truck sell and for how much?
2) Now suppose that the quality is known to current owners, but cannot be ascertained by potential buyers. Assuming that good and bad trucks are equally likely to be offered on the used-car market, how much is a buyer willing to pay at most for an F-150 of unknown quality?
3) Still assuming that the quality is known to current owners, but cannot be ascertained by potential buyers, and in light of your previous answer, will a good used truck sell and for how much?
4) Suppose that after much haggling, the current owner is willing to let her truck go for $6,000. What is the most likely implication?