Suppose Joe has a two-year old Honda Civic that's in excellent condition and that he would be willing to sell for $13,000. Lauren, who is risk-neutral, is considering whether to buy Joe's car. She's willing to pay $14,000 for a two-year Honda Civic that's in excellent condition and only $10,000 for one that's not in excellent condition. Lauren cannot tell whether Joe's car is in excellent condition. She believes that only 20 percent of two-year old Hondas for sale in the market are in excellent condition and that the other 80 percent are not in excellent condition. Will Lauren buy Joe's car?
A) Yes, because Lauren is willing to pay $14,000 for a car that's in excellent condition.
B) No, because Lauren will not be willing to pay Joe $13,000.
C) Maybe, because Lauren might be willing to pay as much as $14,000.
D) Yes, because Lauren will be willing to pay Joe more than $13,000.
Correct Answer:
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