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 V/2.Original owners must sell their used cars.Original owners know what their cars are worth, but buyers can't determine a car's value until they buy it.An owner can either take his car to an appraiser and pay the appraiser $300 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 their value is at least
A)$300.
B)$600.
C)$4,000.
D)$900.
E)$1,200.

Question

Quizplus · Accepted Answer

Given the quality distribution function V/2, where V represents the car's value, it implies that the number of cars valued at less than V is directly proportional to V. In this market, the equilibrium point for deciding whether to appraise a car depends on the cost of appraisal ($300) and the distribution of car values. If a car's value is at least $600, the cost of appraisal ($300) is justified because the appraisal cost is a fraction (50%) of the car's value, aligning with the given distribution function V/2. This makes $600 the minimum value at which appraisal becomes economically rational for car owners, ensuring they don't spend a disproportionate amount on appraisal relative to the car's value.

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