Question

Refer to Problem 22. Now you believe the dealer knows more about the car than you do. How much are you willing to pay? Why? How can this asymmetric information problem be resolved in a competitive market?

Short answer

The buyer desired to pay less than $\$24,000$. The seller knows more about the value of used cars than the buyer, but the buyer does not want to pay more than $\$24,000$due to a lack of knowledge.

Step-by-step solution

Content Introduction

Asymmetric information refers to incomplete information between two parties; therefore, any difference in information provided to people other than the true information leads to inconsistency and market failure.

Content Explanation

The buyer desired to pay less than . The seller knows more about the value of used cars than the buyer, but the buyer does not want to pay more than due to a lack of knowledge.

As a result, because both parties have different knowledge, the deal will be set between $\$20,000$and $\$24,000$. It causes asymmetric information problems, which cause adverse selection and moral hazards.