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

question 42

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: 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

---

Definitions:

Change-Blindness Task

A method in psychology used to measure the tendency to not notice large changes in one's visual field when distracted by other tasks or attentional shifts.

Japanese

The language spoken by the people of Japan, characterized by its complex system of honorifics and its use of three scripts (Kanji, Hiragana, and Katakana).

American Students

American Students can refer to pupils or scholars who are citizens of the United States and are actively engaged in educational activities.

Collectivism

A cultural or political system that emphasizes the priority of group goals over individual goals and the importance of cohesion within social groups.