Critical Mass Problems: Difference between revisions
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====The Model:==== | ====The Model:==== | ||
Cars can be divided into two categories and two subcategories | Cars can be divided into two categories and two subcategories: | ||
*First, a car is new or used | *First, a car is new or used | ||
*Second, a car is good or bad (a <nowiki>"lemon" or not</nowiki>) | *Second, a car is good or bad (a <nowiki>"lemon" or not</nowiki>) | ||
Revision as of 15:38, 28 April 2009
Lemons
It is well known that as soon as a new car is bought and driven off the lot, its value drops significantly. Walrasian economics cannot explain this phenomena.
The Model:
Cars can be divided into two categories and two subcategories:
- First, a car is new or used
- Second, a car is good or bad (a "lemon" or not)
The purchaser of a new car soon finds out whether or not his car is a lemon but, importantly, he is the only one who knows this.
Someone in the market for a used car knows that the market is comprised of both lemons and non-lemons. Knowing this, the used car purchaser seeks to pay no more than a weighted average of the price they'd pay for a lemon and the price they'd pay for a non-lemon using their best estimate of the populations for each.
Let: qL=the estimated population of lemons pL=price willing to pay for a lemon pNL'=price willing to pay for non-lemon
