Scenario: You walk onto a used car lot to buy a car. You are willing to pay up to $15,000 for a car of good quality, but you value a lemon at $0. You are now wondering whether you should trust the car dealer when it comes to the quality of his cars. If you choose to trust him, he can choose to cooperate or defect. If you do not trust him, he will not earn any money and you will not be able to buy a car. If you trust him and he cooperates, both of you will gain, because the dealer values a good-quality car at $13,000. However, if he defects, he will earn $15,000, while you will not derive any satisfaction.
-Refer to the scenario above.You should use ________ to arrive at a decision.

Question

Quizplus · Accepted Answer

Backward induction is the best approach to use in this scenario since it involves working backward from the desired outcome to determine the optimal strategy in each decision point. In this case, the desired outcome is to buy a good-quality car for a fair price of $15,000 or less. Working backward, if the dealer cooperates and provides a good-quality car, then the best strategy is to trust the dealer and buy the car. However, if the dealer defects and tries to sell a lemon for $15,000, then it is better not to trust him and walk away. Therefore, using backward induction, one should only trust the dealer if there is a reasonable expectation of receiving a good-quality car.

Scenario: You Walk onto a Used Car Lot to Buy