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Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,whereas cars of good quality are called plums.Suppose that the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also,assume that a plum is worth $15 000 and a lemon is worth $3 000.
-(Scenario: Used-Car Market)Use Scenario: Used-Car Market.The expected value of a used car is:
A) $9 000.
B) $7 800.
C) $18 000.
D) $10 500.

Question

Quizplus · Accepted Answer

To calculate the expected value, we use the formula:

Expected value = (probability of lemon x value of lemon) + (probability of plum x value of plum)

Expected value = (0.6 x $3,000) + (0.4 x $15,000)
Expected value = $1,800 + $6,000
Expected value = $7,800

Therefore, the expected value of a used car is $7,800. The best choice is B.

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