Question

An advertisement in the local paper offers a “fully loaded” car that is only six months old and has only been driven miles at a price that is percent lower than the average selling price of a brand new car with the same options. Use precise economic terminology to explain whether this discount most likely reflects a “fantastic deal” or something else.

Short answer

The economic terminology used over here is Adverse selection.

Step-by-step solution

Define Asymmetric Information

"Asymmetric information" refers to when one party to a transaction has more information than the other. Asymmetric information, when one party has more knowledge about the goods being sold than the other, makes it possible for sellers to exploit buyers in some situations.

 Step 2: Explaining whether this discount most likely reflects a “fantastic deal” or something else

This is the evidence of informationasymmetry because the seller of the fully-loaded car, despite offering a lower price than the average sale of the same new model does not accept this discount. As it can be seen in an adverse selection situation in which the buyer is having hidden characteristics that can change the buyer's decision and also the price of the car, despite mentioning that it has been used formonths and has only travelledmiles.

Exterior aspects, is that whether the car has been in an accident, how it is discovered mechanically, and also many other features that might be hidden is the cause of true market price to be notless, but much more than that, putting the buyer at a disadvantage.

Therefore, the buyer has a hidden attribute that might affect the buyer's decision and change the car's pricing. It has been driven for onlykilometersand has been used formonths.

Exterior factors, such as whether the automobile has been in an accident, how it is discovered mechanically, and a slew of other factors might lead the genuine market price to be not lower, but considerably higher, putting the buyer at a disadvantage.