Suppose buyers in the used car market are willing to pay $5,000 for a plum (high-quality) used car and $2,500 for a lemon (low-quality) used car. If buyers believe that 50% of the used cars on the market are lemons (low quality), what would they be willing to pay for a used car?

Question

Quizplus · Accepted Answer

Given that buyers estimate 50% of the cars are plums and 50% are lemons, they would be willing to pay an average value: (0.5 * $5,000) + (0.5 * $2,500) = $3,750.

Suppose Buyers in the Used Car Market Are Willing to Pay