Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not. Buyers know that there is a 40 % chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15,000. Based on this probability, the most that a buyer would be willing to pay for a used car is $

Question

Giana Boyer

Business

11 November, 08:18

Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not. Buyers know that there is a 40 % chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15,000. Based on this probability, the most that a buyer would be willing to pay for a used car is $

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Lisa · Answer 1

A buyer would be willing to pay at most $24,000.

Explanation:

There is a 40% chance of getting low quality cars.

Value of high quality car is $30,000.

Value of low quality car is $15,000.

Price of car that buyer will be willing to pay

=40% of lower quality+60% of higher quality

=40% of $15,000+60% of $30,000

=0.4*15,000+0.6*30,000

=$6,000+$18,000

=$24,000

So, the buyers will be willing to pay a maximum value of $24,000.