The market for used sea kayaks has both a high-quality and low-quality variety. High-quality kayaks are valued at $3,000 and low-quality ones at $800. Supply of used high-quality kayaks is Q_H = 0.5P_H - 1,000, and the supply of used low-quality kayaks is Q_L = P_L - 500. Potential buyers cannot distinguish between a high-quality and a low-quality used kayak. Buyers believe that only 3 of every 10 used kayaks are of high quality. In this market, buyers are willing to pay $____ for used kayaks. A) 2,000 B) 1,460 C) 270 D) 0

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Quizplus · Accepted Answer

Given that buyers cannot distinguish between high-quality and low-quality kayaks, they will base their willingness to pay on the expected value of a kayak. The expected value (EV) is calculated as the weighted average of the values of high-quality and low-quality kayaks, based on the probability of each type being offered for sale. With 3 out of 10 kayaks being high-quality (valued at $3,000) and 7 out of 10 being low-quality (valued at $800), the expected value is EV = (3/10)*$3,000 + (7/10)*$800 = $900 + $560 = $1,460. Therefore, buyers are willing to pay $1,460 for a used kayak.

The Market for Used Sea Kayaks Has Both a High-Quality