(Scenario: Used-Car Market)Use Scenario: Used-Car Market.The expected value of a used car is: Scenario: Used-Car Market
In the used-car market,cars of poor quality are called lemons,while 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.

Question

Quizplus · Accepted Answer

The expected value (EV) of a used car can be calculated using the formula: EV = (probability of a lemon * value of a lemon) + (probability of a plum * value of a plum). Substituting the given values: EV = (0.60 * $3,000) + (0.40 * $15,000) = $1,800 + $6,000 = $7,800.