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Sep

25

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Heard of the lemon and plum theory? No? Hold on, I’ll explain using the classic “used car” model from Economics 101.

Consider a market for used cars where half of the sellers have “bad” used cars on offer (let’s call them lemons), with the rest being plums. (You know you’re back in college when you begin sentences with ‘consider a…”!) The “bad” sellers are willing to let their lemons go for Rs. 1000, and the “good” plums are being offered for Rs. 2000. Now, the buyers in the market know that half of the cars on sale are lemons, but there’s no way of telling which one. The price they’d be willing to pay, then, would be the weighted average of lemons and plums: Read more