Answered: Consumers know that some fraction of…

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section: Chapter Questions

Problem 5PA

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4. Consumers know that some fraction of all new cars produced and sold in the market are defective. The defective ones cannot be identified except by those who own them. Assume that cars do not depreciate in value with use. Suppose consumers are risk-neutral and value non-defective cars at $10,000 each and defective cars at $6,000 each.

a. If consumers are willing to pay $8,000 for a new car, what percentage of new cars are defective?

b. If you saw a used car for sale with a price tag of $6,500, would you purchase this car?

c. How many used cars for sale in this market will be good cars?

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