In a used car market- Quality Poor (lemon) Fair Good Excellent % cars in quality 25%...

In a used car market-

Quality	Poor (lemon)	Fair	Good	Excellent
% cars in quality	25%	25%	25%	25%
Seller valuation	$2,000	4,000	6,000	8,000
Buyer Valuation	$4,000	6,000	8,000	10,000

Buyer does not know quality car when making offer/ competition among buyers/ buyers and sellers know probability distribution of types of cars

What price would a buyer offer a seller and what quality of car would be sold at price?

Expert Solution

The expected value of buyer's offer = (0.25 * 4,000) + (0.25 * 6,000) + (0.25 * 8,000) + (0.25 * 10,000)

= 1,000 + 1,500 + 2,000 + 2,500

= $7,500

At a price of $7,500, good quality of car would be sold. Because for good quality cars buyer valuation is $8,000 and seller valuation is $6,000. So, at price of $7,500, seller will be willing to sell and buyer will be willing buy good quality cars.

Rahul Sunny answered 1 year ago

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