7.1 In a used car market, all potential buyers and sellers are risk neutral. The buyers value...
Question:
7.1 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 is .
a. For = 0.1 to = 0.9 in increments of 0.1, calculate the price that the buyers will be willing to pay if all cars are sold. (Hint: Put the values of in column A and put the associated buyers’
expected value of a car in column B, assuming that all cars are sold.)
b. For which values of 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?
Step by Step Answer:
Managerial Economics And Strategy
ISBN: 9780135640944
2nd Global Edition
Authors: Jeffrey M. Perloff, James A. Brander