Scenario: You walk into a used car lot to buy your first car. However, you are not sure of the quality of the cars in the lot and expect one-third of them to be of poor quality.
-Refer to the scenario above.Suppose you decide to buy a Toyota Corolla.You value the car at $10,000,but the car dealer values it at $8,500,which is not known to you.Which of the following is true in this case?
A) There are no gains from trade.
B) There are gains from trade.
C) The transaction will result in negative externalities.
D) The transaction will result in positive externalities.

Question

Quizplus · Accepted Answer

There are gains from trade because the buyer values the car more than the seller does. The buyer values it at $10,000 while the seller values it at $8,500. Therefore, the buyer can pay a price between $8,500 and $10,000 and both parties will benefit from the trade.

Scenario: You Walk into a Used Car Lot to Buy