Question

Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are​ selling, but buyers do not. Buyers know that there is a 50​% chance of getting a​ "lemon", a low quality used car. A high quality used car is worth​ $30,000, and a low quality used car is worth​ $15,000. Based on this​ probability, the most that a buyer would be willing to pay for a used car is ​$________. ​(Enter your response rounded to the nearest​ dollar.)

Answer 1

Answer:

$22,500

Explanation:

Chance of getting low quality car = 50%

Chance of getting high quality car = 50%

Cost of low quality car = $15,000

Cost of high quality car = $30,000

So, Price of the car = 50% of lower quality + 50% of higher quality

= (50% × $15,000) + (50% ×30,000)

=  $7,500 + $15,000

= $22,500

Hence, price of the used car will be $22,500.