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?