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Suppose that there are two types of cars, good and bad. The qualities of cars are not observable but are known to the sellers.

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Suppose that there are two types of cars, good and bad. The qualities of cars are not observable but are known to the sellers. Risk-neutral buyers and sellers have their own valuation of these two types of cars as provided in the table. Types of Cars Good (50% probability) Bad (50% probability) Buyer's Valuation 5,000 3,000 Seller's Valuation 4,500 2,500 Now suppose that sellers value a good car at $4,500 and a bad car at $2,500, and quality is not observed by the buyers. What is the highest price that risk-neutral buyers will offer for a used car if they recognize adverse selection?

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