Suppose buyers in the used car market are willing to pay $6,000 for a plum (high-quality) used car and $3,000 for a lemon (low-quality) used car. If buyers believe that 75% 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

To find the amount buyers are willing to pay for a used car, we use the expected value formula: 
(expected value of plum car x probability of getting plum car) + (expected value of lemon car x probability of getting lemon car)

Plugging in the given values: 
($6,000 x 0.25) + ($3,000 x 0.75) = $1,500 + $2,250 = $3,750

Therefore, choice C is the best answer.

Suppose Buyers in the Used Car Market Are Willing to Pay