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
Types of Cars Buyers Valuation Seller Valuation
Good (50% probability) 5,000 4,500
Bad ( 50% probability) 3,000 2.500
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
Answers: 3
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Suppose that there are two types of cars, good and bad. The qualities of cars are not observable but...
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