Question

The manager of a Pittsburgh shop wishes to sell on eBay a used telescope that is in good condition. The manager knows that prospective buyers perceive a 50-50 chance that the telescope is in good condition. If it is, buyers are willing to pay \(1,000, but if it is in poor condition, they will pay only \)200. What is the average amount a buyer will be willing to pay? Is there a lemons problem? Explain.

Short answer

the average amount a buyer will be willing to pay is $\$600$.

Yes, this is a lemons problem.

Step-by-step solution

Given Information

Lemons Problems are the issues that emerge because of unbalanced data moved by the purchaser and the dealer of an item or administration seeing its worth are known as the lemons issue.

Explanation

The average amount a buyer will be willing to pay for the telescope

$$\begin{gathered} =0.5\times 1000+0.5\times 200 \\ =500+100=\mathrm{\$}600 \end{gathered}$$

Regarding the quality of the telescope, there is an asymmetry between the buyer and seller.

Hence, this is a lemons problem.