This problem is an application of Akerlof’s market for lemons. Suppose there are 100 people who want to sell their cars, and 100 people who want to buy a used car. 50 out of the 100 cars are lemons (i.e., very bad cars that will break down often). The owner of a lemon is willing to part with It for $1000 and the owner of a plum is willing to part with it for $2000. The buyers of the car are willing to pay $2400 for a plum and $1200 for a lemon.a) What is the maximum amount of consumer surplus created by trade in this market equilibrium?b) How much consumer surplus would be created by randomly assigning buyer to sellers? Which method gives the larger surplus?”
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