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25 October, 19:35

Suppose that 85% of sellers have low-quality cars. assume buyers know that 85% of sellers have low-quality cars but are unable to determine the quality of individual cars.

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  1. 25 October, 19:38
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    Expected value of car is the sum of the probability of getting a low-Q car multiplied by the value of a low-Q car and the probability of getting a high-Q car multiplied by the value of a high-Q car.

    = = (chance of HQ car * $9,500) +

    (chance of LQ car * $5,500)

    = = (0.15 * $9,500) + (0.85 * $5,500)

    = = $ 6,100
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