Question

Suppose that everyone in a​ used-car example is risk​ neutral, potential car buyers value lemons at ​$750 and good used cars at ​$2 comma 800​, the reservation price of lemon owners is ​$250​, and the reservation price of owners of​ high-quality used cars is ​$1 comma 250. The share of current owners who have lemons is theta. For what values of theta do all the potential sellers sell their used​ cars? Describe the equilibrium. The most a​ risk-neutral buyer would be willing to pay for a car of unknown quality as a function of theta is pequals nothing. ​(Properly format your expression using the tools in the​ palette.)

Answer 1

Answer:

Theta<75.60%

Explanation:

P=$750*theta+$2,800*(1-theta)

P= $750+$2,800-$2800theta

=$2,800-$2,050(Price as a function of theta)

P>$1,250

$2,800-$2,050>$1,250

Thata< $1,550÷$2,050

Theta<75.60%