In a used car market, all potential buyers and sellers are risk neutral. The buyers value the

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In a used car market, all potential buyers and sellers are risk neutral. The buyers value the good-quality used cars at $10,000 and the lemons at $4,000, while the reservation price of the lemon owners is $2,000. The probability that a car potentially available for sale in the market is a lemon isθ. 

a. For θ = 0.1 to θ = 0.9 in increments of 0.1, calculate the price that the buyers will be willing to pay if all cars are sold.  

b. For which values of θ will all cars be sold if sellers of good-quality cars have a reservation price of $7,600? 

c. How does your answer to (b) change if sellers of good used cars have a reservation price of $8,500? 

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Managerial Economics and Strategy

ISBN: 978-0134167879

2nd edition

Authors: Jeffrey M. Perloff, James A. Brander

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