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

question 46

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:
$$\begin{array} { | l | l | l | } \hline \text { Types of Cars } & \text { Buyer's Valuation } & \text { Beller's Valuation } \\\hline \text { Good } & & \\\text { (50\% probability) } & 5,000 & 4,500 \\\hline \text { Bad } & & \\\text { (50\% probability) } & 3,000 & 2,500 \\\hline\end{array}$$ Now 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:

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A natural resource that is mined and used primarily in the production of steel.

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Government guidelines that determine the collection and management of taxes within a jurisdiction, affecting how wealth is distributed among the population.

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A curve demonstrating the maximum achievable output levels for two or more goods, given a set of inputs and technology.

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The avoiding of potential profits from alternative choices by settling on one.