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 follows:
Types of Cars Buyer's Valuation Seller's Valuation
Good (50% probability) 5,000 4,500
Bad (50% probability) 3,000 2,500
When a buyer does not observe the quality, what is the highest price she will offer for a used car if she ignores adverse selection?
Question 13 options:
$4,000
$2,500
$4,500
$3,000