2. Suppose there are two types of used cars, lemons (L) and peaches (P).

| December 7, 2018

2. Suppose there are two types of used cars, lemons (L) and peaches (P). There is a continuum of buyers and a continuum of sellers. The masses of buyers and sellers are equal. Each buyer wants to buy at most one car and each seller has exactly one car to sell. Potential buyers value lemons at £300 and peaches at £600. The sellers value lemons at £200 and peaches at £400. Buyers and sellers are risk neutral. Everybody knows that the fraction ? of all cars are lemons. Selle …

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