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Let us consider a situation that a market of used cars consists of two qualities, good and bad, of commodities. Consumers of used cars value good used cars at 600 thousand yen and 300 thousand yen for bad ones. They cannot distinguish the quality of any given car. In contrast, retailers of the cars value good used cars at 450 thousand yen and 200 thousand yen for bad ones, and they can distinguish the qualities. Suppose that the distribution over good cars and bad ones is (μ, 1 − μ). Answer the following questions.
(1) When μ = 1/3 and the consumers are familiar with the distribution, how much is the consumers’ willingness to pay?
(2) In the previous question (1), explain how the used cars are supplied in the market.
(3) To prevent adverse selection, how many good used cars are needed to supply in the market.
(4) Explain ‘adverse selection.’ And also explain from the viewpoints of the consumers’ and retailers’ decisions why we have two cases that adverse selection occurs and not under the identical evaluations of used cars.
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（1）600*1/3+300*2/3＝400
（2）the price that consumes’ willingness to pay is 400, it is lower than the price of good used cars (450), so the retailers do not want to supply the good cars, all the cars sold on the market are bad ones.
(3)600*x+300*(1-x)=450
x=0.5
(4)Adverse selection: it refers to a market process in which "b ...
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