Jerry's Auction House in Purloined Hubcap, Oregon, Holds Sealed-Bid Used-Car

question 8

Multiple Choice

Jerry's Auction House in Purloined Hubcap, Oregon, holds sealed-bid used-car auctions every Wednesday. Each car is sold to the highest bidder at the second-highest bidder's bid. On average, of the cars that are auctioned are lemons and are good used cars. A good used car is worth $1,200 to any buyer. A lemon is worth $270 to any buyer. Most buyers can do no better than picking at random from among these used cars. The only exception is Al Crankcase. Recall that Al can sometimes detect lemons by tasting the oil on the car's dipstick. A good car never fails Al's test, but half of the lemons fail his test. Al attends every auction, licks every dipstick, and bids his expected value of every car given the results of his test. Al will bid

• A) $735 for cars that pass his test and $270 for cars that fail his test. Normal bidders will get only lemons.
• B) $600 for cars that pass his test and $400 for cars that fail his test. Normal bidders will get only lemons.
• C) $400 for cars that pass his test and $270 for cars that fail his test. Normal bidders will get good cars onlyof the time.
• D) $580 for cars that pass his test and $370 for cars that fail his test. Normal bidders will get good cars onlyof the time.
• E) $540 for cars that pass his test and $270 for cars that fail his test. Normal bidders will get good cars onlyof the time.

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Definitions:

Debt Policies

Guidelines or strategies that govern how a company or government manages its debt, including borrowing practices and repayment schedules.

Financial Plan

A document detailing an individual's or organization's current financial status and long-term monetary goals, along with strategies to achieve those goals.

Dividend Payout Ratio

A financial metric that shows what percentage of a company's net income is distributed to its shareholders as dividends.

Retention Ratio

A financial metric that shows the percentage of a company's earnings that are not distributed as dividends but are reinvested in the business.