John and Jack Are Both Trying to Sell a Used

question 134

Multiple Choice

John and Jack are both trying to sell a used car to Jim. John's car is a lemon, a car that has a serious but nonobvious problem. Jack's car is a cherry, a car that has no problems. Jim cannot tell the difference between the cars. Economists say this information problem might be solved with signaling. Who has an incentive to find a way to signal quality?

• A) Both Jack and John
• B) Jack but not John
• C) John but not Jack
• D) Jim

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Definitions:

Present Value

The current value of a future sum of money or stream of cash flows given a specified rate of return, often used in the time value of money calculations.

Growth Opportunities

Potential situations or initiatives that could lead to business expansion, including new markets, products, or services.

Expected Rate

The anticipated return on an investment over a specific period, often based on historical data and analysis of market conditions.

Constant-Growth Rate

A growth rate applied continuously and at a constant percentage, often used in the dividend discount model to value stocks.