In the town of Belapur, 5000 used cars are available for sale. The cars vary in quality and only the car owners know the true worth of their car. All used cars look the same to potential buyers. If a car is of quality , then the original owner is ready to sell it for any price greater than or equal to . For a buyer, the expected worth of a car is equal to half of the number of cars selling in the market. As the buyer does not know the exact quality of the car, he is willing to pay a price that is equal to 1000 more than the expected worth of the car. At the equilibrium, the number of cars that remain unsold in the market is ______ (in integer)
2 marksMicroeconomicsAsymmetric informationAdverse selection and the market for lemonsHardabout 4 min
GATE 2026 Question 58: Asymmetric information
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In the town of Belapur, 5000 used cars are available for sale. The cars vary in quality and only the car owners know the true worth of their car. All used cars look the same to potential buyers. If a car is of quality x, then the original owner is ready to sell it for any price greater than or equal to x. For a buyer, the expected worth of a car is equal to half of the number of cars selling in the market. As the buyer does not know the exact quality of the car, he is willing to pay a price that is equal to 1000 more than the expected worth of the car. At the equilibrium, the number of cars that remain unsold in the market is (in integer)
Asymmetric information has come up 16 times in 5 exams since 2014.
What this question tests
This question is on Adverse selection and the market for lemons, part of Asymmetric information in Microeconomics.
How hidden quality can make good products or good risks leave a market.
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