Scenario: Used Car Market In the used car market, cars of poor quality are often referred to as "lemons," while cars that are of good quality are considered to be "plums." Suppose the probability of obtaining a lemon is 60% and the probability of obtaining a plum is 40%.Also assume a plum is worth $15,000 and a lemon is worth $3,000.
(Scenario: Used Car Market) Look at the scenario Used Car market.In this market, the expected value of a used car would be equal to:

Question

Quizplus · Accepted Answer

To calculate the expected value of a used car, we multiply the value of each outcome by its probability and then add up the results.

Expected Value = (Probability of Lemon x Value of Lemon) + (Probability of Plum x Value of Plum) 
Expected Value = (0.60 x $3,000) + (0.40 x $15,000) 
Expected Value = $1,800 + $6,000 
Expected Value = $7,800

Therefore, the expected value of a used car in this market is $7,800.

Scenario: Used Car Market in the Used Car Market, Cars