## (Solution Download) 1 Consider a thin used car market Someone just developed a

1. Consider a thin used-car market. Someone just developed a device that can instantly identify the nearest plum in a used-car lot. The device works only once. The maximum amount that a consumer would be willing to pay for the device equals_______ minus _______.
2. A money-back guarantee will be provided by the owners of _______, but not by the owners of _______ (lemons/plums).
3. Paying for Information. You are willing to pay \$7,000 for a high-quality car a plum. The current price of used cars is \$4,000, and 4 of 5 cars in the market are lemons, meaning that 1 in 5 is a plum.
a. Suppose you could pay a finder s fee to a personal shopper/mechanic who will find you a plum at a price of \$4,000. What is the maximum you are willing to pay as a finder s fee?
b. As you shop for a used car, you will bring each car you consider to your mechanic, who will thoroughly inspect the car and tell you for certain whether it is a plum or a lemon. If the price per inspection is \$400, is it worth the money?
c. How would your answer to part (b) change if only 1 out of 10 used cars was a plum?
4. Money-Back-Plus Guarantee. The equilibrium price in the thin market is \$2,600. Suppose car sellers provide a special money-back-plus guarantee: A dissatisfied buyer can return a car for a refund plus \$100.
a. If a lemon owner sells his or her car for \$5,000, the owner s gain from providing the guarantee is \$ _______.
b. If a plum owner sells his or her car for \$5,000, the owner s gain from providing the guarantee is \$ _______.

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