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Consumers Know That Some Fraction X of All New Cars

Question 88

Multiple Choice

Consumers know that some fraction X of all new cars produced and sold in the market are defective.The defective ones cannot be identified except by those who own them.Assume for this problem that cars do not depreciate with use.
Suppose the consumers are risk-neutral with a reservation price of a used car $6,000.Good used cars are worth $8,000 and lemon used cars are worth $2,000 to their owners.What is the fraction X?


A) 0.25
B) 0.33
C) 0.5
D) 0.67

Correct Answer:

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