Solved

Suppose That There Are Two Types of Cars,good and Bad

Question 98

Multiple Choice

Suppose that there are two types of cars,good and bad.The qualities of cars are not observable but are known to the sellers.Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:
 Types of Cars  Buyer’s Valuation  Beller’s Valuation  Good  (50% probability)  5,0004,500 Bad  (50% probability)  3,0002,500\begin{array} { | l | l | l | } \hline \text { Types of Cars } & \text { Buyer's Valuation } & \text { Beller's Valuation } \\\hline \text { Good } & & \\\text { (50\% probability) } & 5,000 & 4,500 \\\hline \text { Bad } & & \\\text { (50\% probability) } & 3,000 & 2,500 \\\hline\end{array} When a buyer does not observe the quality,what is the highest price she will offer for a used car if she ignores adverse selection?


A) $2,500
B) $3,000
C) $4,000
D) $4,500

Correct Answer:

verifed

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Related Questions