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

question 117

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: When a buyer does not observe the quality, what is the highest price she will offer for a used car if she ignores adverse selection?

• A) $2,500
• B) $3,000
• C) $4,000
• D) $4,500