Consider a local used car market with an unlimited number of buyers, 30 sellers of high-quality cars, 50 sellers of medium-quality cars and L sellers of low-quality cars. Each seller offers up to 1 car for sale. Sellers of high-quality cars value their car at $33,000, sellers of medium-quality cars at $24,000, and sellers of low-quality cars at $10,000. Buyers value high-quality cars at $50,000, medium-quality cars at $32,000, and low-quality cars at $9,000. Answer the following questions according to the lemon’s model that we discussed in class.
(4 marks) For which values of L will exactly two quality grades of cars be traded in equilibrium? Which are the traded quality grades? Explain your answer.