ECON 2035 Chapter Notes - Chapter 7: Financial Institution, Experian, Mci Inc.
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The uninformed buyers would initially equate the price of a used car as a good indication of the average quality of the car. Owners of better quality cars would not be willing to sell their cars for a lower price. Only owners of the lower quality cars, the lemons , would want to sell the car. Buyers, realizing this, would demand less used cars and the price of used cars would fall and the market would fail: ex. Investment project: : firm 1 (safe): return , firm 2 (risk): 2/3 return %150, 1/3 return sh, saver: another asset: return . Expected payment on bond = promised payment x probability of project success: expected payment needs to be at least . Saver knows probability but doesn"t know which is risky and which is safe: future, safe promise , profit , risk expected return (2/3)(150)= firm will not sell bonds. Don"t sell because: promise then need return of (110/(2/3))=
