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

question 12

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 $3,000 to any buyer. A lemon is worth $150 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) $1,500 for cars that pass his test and $1,000 for cars that fail his test. Normal bidders will get only lemons.
• B) $1,100 for cars that pass his test and $250 for cars that fail his test. Normal bidders will get good cars onlyof the time.
• C) $1,575 for cars that pass his test and $150 for cars that fail his test. Normal bidders will get only lemons.
• D) $1,000 for cars that pass his test and $150 for cars that fail his test. Normal bidders will get good cars onlyof the time.
• E) $300 for cars that pass his test and $150 for cars that fail his test. Normal bidders will get good cars onlyof the time.

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Definitions:

Default Rates

The percentage of borrowers who fail to make required payments on their loans within a specified period.

Secondary Mortgage Market

The market where home loans and servicing rights are bought and sold between lenders and investors.

Financial Institution

An establishment that conducts financial transactions such as investments, loans, and deposits.

Household Debt/income Ratio

A measure comparing the debt level of a household to its income, indicating financial health and borrowing capacity.