When a Buyer Does Not Observe the Quality,based on the Following

question 137

Multiple Choice

When a buyer does not observe the quality,based on the following table,what is the highest price she will offer for a used car if she ignores adverse selection?
$$\begin{array} { | l | l | l | } \hline \text { Types of Cars } & \text { Buyer's Valuation } & \text { Seller's Valuation } \\\hline \begin{array} { l } \text { Good } \\\text { (50\% probability) }\end{array} & 10,000 &9,500 \\\hline \begin{array} { l } \text { Bad } \\\text { (50\% probability) }\end{array} & 5,000 & 4,500 \\\hline\end{array}$$

• A) $10,000
• B) $5,000
• C) $7,500
• D) $7,000

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Definitions:

Profit Margin

A financial metric that measures the percentage of revenue that exceeds the cost of goods sold, indicating how much profit a company makes on sales.

Depreciation Expense

The allocation of the cost of an asset over its useful life.

After-tax Salvage Value

The net value of an asset after it has been sold and all related taxes have been paid.

Marginal Tax Rate

The rate at which the next dollar of taxable income is taxed, indicating the impact of the last dollar earned on one's tax obligations.