Scenario: Tom wants to buy a used iPhone from an online exchange Web site. He expects 50 percent of the used phones to have some defect. He is willing to pay up to $80 for a phone without any defect and $0 for a defective phone. An owner of a good-quality iPhone is likely to sell his phone if he gets a price of $70.
-Refer to the scenario above.Tom is likely to get a defective phone if he is willing to pay an amount of ________.
A) $80
B) $100
C) $40
D) $120

Question

Quizplus · Accepted Answer

Tom is willing to pay up to $80 for a phone without any defect, but he also expects 50% of the used phones to have some defect. Therefore, the expected value of a used iPhone for Tom is $40 ($80 x 0.5). If he is willing to pay more than $40, he is likely to get a phone without any defect. Therefore, the best choice is option C.

Scenario: Tom Wants to Buy a Used IPhone from an Online