If a consumer is willing to pay $5,000 for a used car that is a free of mechanical problems and $1,000 for a used car that will require extensive repairs, the consumer will offer:
A) $1,000 for a used car if the probability that it is free of mechanical problems is 50 percent.
B) $3,000 for a used car if the probability that it is free of mechanical problems is 50 percent.
C) $5,000 for a used car if the probability that it is free of mechanical problems is 50 percent.
D) $6,000 for a used car if the probability that it is free of mechanical problems is 50 percent.

Question

Quizplus · Accepted Answer

The expected value of the car is calculated as (0.5 * $5,000) + (0.5 * $1,000) = $3,000, which is what the consumer will offer.

If a Consumer Is Willing to Pay $5,000 for a Used