Refer to Problem 22. Now you believe the dealer knows more about the car than you do. How much are you willing to pay? Why? How can this asymmetric information problem be resolved in a competitive market?

use the fact that the expected value of an event is a probability weighted average, the sum of each possible outcome multiplied by the probability of the event occurring.

Problem 22

You are in the market for a used car and decide to visit a used-car dealership. You know that the Blue Book value of the car you are looking at is between

$20,000 and $24,000. If you believe the dealer knows as much about the car as you do, how much are you willing to pay? Why? Assume that you care about only the expected value of the car you will buy and that the car values are symmetrically distributed.

use the fact that the expected value of an event is a probability weighted average, the sum of each possible outcome multiplied by the probability of the event occurring.