Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 2,000 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 $500 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)$1,500.
B)$1,000.
C)$500
D)$1,000
E)$2,000

Question

Quizplus · Accepted Answer

If an owner's car is worth less than $1,000, they will not bother paying the $500 fee to have the car appraised since they will not receive a profit after paying the fee.

If an owner's car is worth $1,000 or more, they will pay the fee and have their car appraised. If the appraised value of the car is less than $1,000, the owner will choose to sell the car unappraised since they can receive a higher profit. However, if the appraised value of the car is $1,000 or more, the owner will choose to sell the car appraised since they can receive a higher profit even after paying the appraisal fee.

Therefore, the equilibrium point is at $1,000, where owners with cars worth less than $1,000 will sell their cars unappraised and owners with cars worth $1,000 or more will pay for the appraisal and sell the car appraised.

Suppose That in New Crankshaft, Pennsylvania, the Quality Distribution of the 2,000