Suppose the probability of a near-new car being good is 0.4 while its probability of being a lemon is 0.6.If risk-neutral consumers are willing to pay $14,000 if the car is in good condition and $8,000 if it is a lemon, a risk averse buyer who knows those probabilities would be willing to pay $10,400 for the car.

Question

Quizplus · Accepted Answer

The information provided is not enough to determine the willingness to pay of a risk-averse buyer. The probabilities of the car being good or a lemon are given, but we need to know the buyer's risk aversion level to determine their willingness to pay.

Suppose the Probability of a Near-New Car Being Good Is