Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 8,000 used cars on the market is such that the number of used cars of value less than V is . Original owners must sell their used cars. Original owners know what their cars are worth, but buyers can't determine a car's quality until they buy it. An owner can either take his car to an appraiser and pay the appraiser $100 to appraise the car (accurately and credibly) or sell the car unappraised. In equilibrium, car owners will have their cars appraised if and only if the car's value is at least

Question

Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 8,000 used cars on the market is such that the number of used cars of value less than V is  . Original owners must sell their used cars. Original owners know what their cars are worth, but buyers can't determine a car's quality until they buy it. An owner can either take his car to an appraiser and pay the appraiser $100 to appraise the car (accurately and credibly) or sell the car unappraised. In equilibrium, car owners will have their cars appraised if and only if the car's value is at least

Quizplus · Accepted Answer

The question describes adverse selection, where buyers cannot differentiate between good and bad quality cars. Owners with lower value cars may be more likely to sell unappraised since the cost of appraisal may be high relative to the car's value. For there to be an equilibrium where only higher value cars are appraised, the benefit of having a credible appraisal needs to outweigh the cost of appraisal. In this case, the benefit of having a credible appraisal is the increase in price that the owner can receive for their car. Assuming a linear relationship between the value of the car and the increase in price with appraisal, the owner would need to receive at least $100 more with appraisal than without it for it to be worthwhile. This means that the value of the car needs to be at least $200 ($100 for cost of appraisal and $100 for benefit of higher sale price), hence the answer is D.

Suppose That in New Crankshaft, Pennsylvania, the Quality Distribution of the 8,000