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: 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?

Question

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:  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?

Quizplus · Accepted Answer

The highest price a buyer will offer for a car is determined by their valuation of the car. In this case, the highest valuation for a used car is $4,000 according to the table. Therefore, the highest price a buyer will offer for a used car is $4,000, assuming they ignore adverse selection.

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