Why does a rebate reduce the value of a one-year old used car by only 70-85% of the amount of the rebate?

titled How Detroit is Rui Show more Read the following summary for the article from the Wall Street Journal titled How Detroit is Ruining your Cars Value The zero percent financing deals and rebates on domestic new car purchases have triggered sharp declines in the values of both these cars the minute they drive off the lot and used cars in general. There are two reasons for the decline in the price of used cars. The first is the increase in the supply of used cars. With more people trading in used cars there are more used cars on the market. The second is the decrease in demand for used cars. With financing deals on new cars more people are buying new cars instead of used cars. The article nicely describes a cascade effect in the prices of used cars. The financing deals are accelerating the rate cars lose their value as they age. It works like this: Buying a $20000 car with a $2000 rebate lowers your out-of-pocket cost to $18000. But the rebate instantly shrinks the new cars value by the same amount. It also lowers the trade-in price of the previous years model. The effect then cascades through older versions of the vehicle. The article notes that a one-year old car loses in value somewhere between 70 and 85 percent of the amount of the rebate on the new model of the car. a. Use supply and demand to analyze the effect of a $2000 new-car rebate on the price and quantity of used cars. Explain in words the effects of the rebate on supply and demand and its effects on quantity and price. b. Why does a rebate reduce the value of a one-year old used car by only 70-85% of the amount of the rebate? That is why not the full amount of the rebate? c. Suppose the owner of a one-year old Ford sedan is going to purchase a new Toyota SUV. Is the Taurus owner better off if he goes to purchase the Toyota after Ford introduces a rebate on the purchase of a new sedan? Show less

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