Mix of Lemons and Plums in the Week-Old Car Market. Recall the application The Resale Value of a Week-Old Car. Suppose the value of a high-quality week-old car (a plum) is $20,000 (the same as the purchase price of a new car), while the value of a lowquality week-old car (a lemon) is $10,000. Suppose that at a price of $16,000 per car, 6 of 10 cars on the used market are plums and 4 of 10 are lemons. (Related to Application 1 on page 624.)
a. How much is the typical buyer willing to pay for a used car in the mixed market?
b. Is the $16,000 price an equilibrium price? Why or why not?
c. Suppose that for every 10 new cars sold by new-car dealers, 9 are plums and only 1 is a lemon. Why is the equilibrium mix in the used car market different from the mix of new cars sold?