Suppose That There Are Two Types of Cars,good and Bad

question 28

Multiple Choice

Suppose that there are two types of cars,good and bad.The qualities of cars are not observable but are known to the sellers.Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:
$$\begin{array} { | l | l | l | } \hline \text { Types of Cars } & \text { Buyer's Valuation } & \text { Beller's Valuation } \\\hline \text { Good } & & \\\text { (50\% probability) } & 5,000 & 4,500 \\\hline \text { Bad } & & \\\text { (50\% probability) } & 3,000 & 2,500 \\\hline\end{array}$$ Suppose that both buyers and sellers observe the quality.What happens?

• A) Both good and bad cars are traded.
• B) Only good cars are traded.
• C) Only bad cars are traded.
• D) Neither good nor bad cars are traded.

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Definitions:

Inflation Rate

The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Demand

The desire and ability of consumers to purchase goods or services at given prices.

Supply

The total amount of a product or service that is available for purchase at any given price.

Dollar Appreciates

A situation where the value of the U.S. dollar increases compared to other currencies, affecting international trade and economic dynamics.