You Are Responsible for Purchasing 25 Used Cars for Your

question 207

Multiple Choice

You are responsible for purchasing 25 used cars for your company. Star Brand cars costs $7,500 and Diamond Brand cars cost $6,000. Based on experience, you believe that 20% of Star Brand cars are lemons (low quality) while 40% of Diamond Brand cars are lemons (low quality) . You are willing to pay $5,000 for a known lemon and $12,000 for a known plum. Which brand do you purchase?

• A) Star
• B) Diamond
• C) You are indifferent between brands.
• D) You don't buy either brand.

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Definitions:

Surplus

The condition where quantity supplied exceeds quantity demanded, often leading to a decrease in prices.

Price Ceiling

A legally established maximum price that can be charged for a product or service, often set by government to prevent prices from reaching too high levels.

Price Floor

A government-set minimum price at which a product can be sold, aimed to prevent the price from falling too low.

Shortage

A market condition where the quantity demanded of a good exceeds the quantity supplied at the current price, leading to upward pressure on price.