Critical Mass Problems: Difference between revisions
| Line 15: | Line 15: | ||
Thus, | Thus, | ||
Let: | Let: | ||
''q''<sub>'' | ''q''<sub>''l''</sub>=the estimated population of lemons | ||
''p''<sub>'' | ''p''<sub>''l''</sub>=price willing to pay for a lemon | ||
''p''<sub>'' | ''p''<sub>''nl'</sub>=price willing to pay for non-lemon | ||
==Tipping== | ==Tipping== | ||
Revision as of 15:35, 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.
So, what happens?
Cars can be divided into two categories and two subcategories of cars:
- 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.
Thus, Let: ql=the estimated population of lemons pl=price willing to pay for a lemon pnl'=price willing to pay for non-lemon
