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 CarsBuyer's ValuationSeller's ValuationGood (50% probability)5,0004,500Bad (50% probability)3,0002,500Now suppose that sellers value a good car at $4,500 and a bad car at $2,500, and quality is not observed by the buyers. What is the highest price that risk-neutral buyers will offer for a used car if they recognize adverse selection?
A. $4,000
B. $3,000
C. $4,500
D. $2,500
Answer: B
Economics
You might also like to view...
The production function
A) gives the maximum amount of output for a given level of inputs. B) gives the implicit costs for all inputs. C) gives the amount of time necessary to reach the long run. D) allows us to compute the difference between accounting and economic profits.
Economics
A radio ad conveys the hours a store is open. By doing this, the ad ______.
a. creates a more elastic demand curve. b. creates a demonstration effect c. communicates important information d. communicates misleading information
Economics