Suppose That Sellers Value a Good Car at $4,500 and a Bad

question 21

Multiple Choice

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)$2,500.
• B)$3,000.
• C)$4,000.
• D)$4,500.

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Definitions:

Voting Stock

Shares of a corporation that give the shareholder the right to vote on matters of corporate policy and on the selection of the board of directors.

Cash Dividend

A disbursement from a corporation to its stockholders, typically coming from its earnings.

Net Income

The ultimate earnings of a company, arrived at by reducing its revenues by all incurred expenses and taxes.

Nonvoting Preferred Stock

A type of preferred stock that does not grant the holder voting rights at the corporation’s shareholders' meetings.