You are in the market for a used 2013 Honda Accord. You know that half of the 2013 Accords are lemons and half are peaches. If you could be assured that the Accord you were buying was a peach, you would be willing to pay up to $10,000. On the other hand, you would only be willing to pay $2,000 for a lemon. You have no ability to discern whether any particular Accord is a lemon or a peach. Sellers of Accords, on the other hand, are likely to know whether their particular car is a lemon or a peach. Suppose sellers of lemons will sell their cars for $1,500 or more and peach sellers will be willing to sell their cars for $8,500 or more. You are willing to offer ________ for a car of unknown quality and ________ are willing to sell you their car.
A) $2,000; lemon owners only
B) $5,000; lemon owners only
C) $6,000; lemon owners only
D) $8,500; both lemon and peach owners

Question

Quizplus · Accepted Answer

Given the information, the maximum you would be willing to pay for a car of unknown quality (with a 50/50 chance of being a lemon or a peach) is the average of your valuations for each ($10,000 for a peach and $2,000 for a lemon), which is $6,000. However, at this price, only lemon owners would be willing to sell their cars since it's above their minimum selling price of $1,500 but below the peach owners' minimum of $8,500.

You Are in the Market for a Used 2013 Honda