Problem
Adverse Selection of MP3 Players. Consider the market for used MP3 players, with knowledgeable sellers and ignorant buyers. Half the MP3 players in existence are plums and half are lemons. Each buyer is willing to pay $50 for a plum or $20 for a lemon. The minimum supply price for a plum is $10 and the minimum supply price for a lemon is $2.
a. In equilibrium, will the market be thin or will all the used MP3 players in the market belemons? Explain and illustrate your answer with a complete graph.
b. Suppose that at a price of $26, the quantity of plums is 20 and the quantity of lemons is 80. Is this an equilibrium? Explain and illustrate your answer with a complete graph.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.