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

question 25

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 buyers do not observe the quality, what happens in the market?

• 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:

MBA Degree

A Master of Business Administration degree, a graduate-level education that focuses on the theoretical and practical aspects of business and management.

Externalities

Economic side effects or by-products that affect uninvolved third parties; can be negative (like pollution) or positive (like education benefits), and are not reflected in market prices.

Property Rights

Legal rights to own, use, and dispose of assets or resources, playing a critical role in determining the allocation and use of resources in an economy.

Enforced

Imposed by authority or law, ensuring compliance or obedience through the application of rules or regulations.