Suppose in the market for used cars, buyers would be willing to pay $9,000 for a car in good condition, while buyers would have to incur a cost of $3,500 to repair a car in poor condition.Assume a risk-averse buyer is aware that some of the cars are lemons, but is uninformed about the probability of a car being in good condition or otherwise.What price would this buyer, seeking only to minimize risk, be willing to pay for a car?
A)$3,925
B)$5,500
C)$7,775
D)$5,850

Question

Quizplus · Accepted Answer

To minimize risk, the buyer would be willing to pay a price between the expected value of a car in good condition ($9,000) and the expected value of a car in poor condition after repairs ($9,000 - $3,500 = $5,500). This is because the buyer would rather pay more upfront for a car in good condition than risk buying a lemon and having to pay for repairs.

Therefore, the best choice is B, as it falls within this price range.

Suppose in the Market for Used Cars, Buyers Would Be