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 40​% 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​ $15,000. Based on this​ probability, the most that a buyer would be willing to pay for a used car is ​$ nothing. ​(Enter your response rounded to the nearest​ dollar.) Which of the following would best​ "solve" the asymmetric information problem in this​ market? A. ​High-quality sellers could offer warranties or product guarantees. B. Prohibiting the sale of​ low-quality cars. C. ​Low-quality sellers could establish industry standards. D. It is not possible to solve the asymmetric information problem in this market.

Answer 1

Correct answer is A and C

Step-by-step explanation:

Solution

For the price of the car,

The buyers willingly to pay for the used call is computed below:

From the question given, the probability the buyers know that there is a 40 % change of having a low quality used car

A quality of a higher used call is worth = $30,000'

A quality of a lower used call is worth= $15,000.

So,

The price of the car = lower quality of 40% * Higher quality of 60%

= 0.4 (15,000- X) + 0.6 (30,000)

X = 6000+ 18000

Therefore X = 24000

The value of buyers ready to pay for the car that is not new, but ude already is =$ 24,000