Question

How can you be sure that price P is the same for all vehicles?

Why can't sellers with better cars not simply advertise their high
car quality and charge higher prices?

Answer 1

Buyers often assume that higher prices indicate higher quality and lower prices indicate lower quality. Therefore, sellers with better cars cannot simply advertise their high car quality and charge higher prices.

Step-by-step explanation:

In markets with imperfect information, sellers may have trouble reaching an equilibrium price and quantity. Buyers often assume that higher prices indicate higher quality and lower prices indicate lower quality. Therefore, sellers with better cars cannot simply advertise their high car quality and charge higher prices, as buyers may not believe the claim and may still prefer the higher priced cars assuming they are of better quality.