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In class we discussed how uncertainty could lead to inefficiency in the market for used cars. This inefficiency results from the lack of information among buyers.

First, explain in detail and illustrate the general concept of market inefficiency.

For used cars, explain using supply/demand how the buyer’s strategy of basing her price offer on the perceived average quality of cars may increase the sales of low quality used cars, and decrease the market for high quality cars. Why is the market outcome considered inefficient? Explain why this inefficiency should be less prominent in the market for new cars.

Discuss some of the strategies sellers of quality used cars use to distinguish their product from others. How successful do you think these practices are? Discuss.

Finally, discuss the possible inefficiency in the fast food market resulting from the “lemons” problem. Explain why the model predicts too many franchised fast food restaurants and too few non-franchised restaurants.

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