There Are Two Types of Used Cars, High Quality and Low

question 24

Multiple Choice

There are two types of used cars, high quality and low quality.Buyers cannot distinguish the two types until after they have purchased them.Owners of high-quality cars will sell them if the price is $2,000 or higher.Owners of low-quality cars will sell them if the price is $1,000 or higher.Buyers value a high-quality used car at $4,266 and a low-quality used car at $1,200.Suppose that 30% of used cars are of high quality and 70% of used cars are of low quality.In equilibrium,

• A)only high-quality used cars will be sold.
• B)only low-quality used cars will be sold.
• C)all used cars will be sold.
• D)no used cars will be sold.
• E)high-quality used cars will sell for a uniformly higher price than low-quality used cars.

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Definitions:

Compensated Surety

A guarantor who receives compensation for guaranteeing the performance or obligations of another party.

Accommodation Surety

A third party who guarantees the debt or obligation of another without benefit to themselves, often to help the borrower obtain a loan.

Guarantor

An individual or entity that agrees to be responsible for another's debt or performance under a contract if the primary party does not meet their obligations.

Guaranty Contract

A legal agreement where a guarantor agrees to fulfill the financial obligations of a debtor to a lender, in case the debtor fails to do so.