Ted went to the market to buy Good X. He was willing to pay up to $2.50 per unit of the good

However, he expected some units of the good to be defective. Therefore, when the seller asked for a price of $2.30 per unit, he refused to pay more than $2 for each unit. If the seller knows which units of the good are defective, what is most likely to happen in this case?

Ted valued each unit of Good X at $2.50, while the seller valued it at $2.30. If Ted had perfect information about the quality of the good, trade would have taken place at a price between $2.30 and $2.50. However, because Ted was unaware of the quality of the good and had a lower value for defective units of the good, he was willing to pay only $2 per unit. At $2, the seller would not be willing to give him good units of the good because he he had a higher value for those units. As a result, Ted would end up buying defective units of Good X. Such a phenomenon is commonly known as adverse selection.