Difficulty: Jerry's Auction House in Purloined Hubcap, Oregon, holds sealed-bid used-car auctions every Wednesday. Each car is soldthighest bidder at the second-highest bidder's bid. On average, 2/3 of the cars that are auctioned are lemons and 1/3 are good used cars.good used car is worth $2,700 to any buyer. A lemon is worth $240 to any buyer. Most buyers can do no better than picking at random.among these used cars. The only exception is Al Crankcase. Recall that Al can sometimes detect lemons by tasting the oil on the car'sdipstick. A good car never fails Al's test, but half of the lemons fail his test. Al attends every auction, licks every dipstick, and bids hisexpected value of every car given the results of his test. Al will bidSelect one:O A. $1,350 for cars that pass his test and $900 for cars that fail his test. Normal bidders will get only lemons.O B. $900 for cars that pass his test and $240 for cars that fail his test. Normal bidders will get good cars only 1/6 of the time.OC.S1,470 for cars that pass his test and $240 for cars that fail his test. Normal bidders will get only lemons.O D. $480 for cars that pass his test and $240 for cars that fail his test. Normal bidders will get good cars only 1/12 of the time.O E. $1.060 for cars that pass his test and $340 for cars that fail his test. Normal bidders will get good cars only 1/6 of the time.

A bidder is a person who offers to acquire an item from a seller at a defined price in a market.An…

Difficulty: Jerry's Auction House in Purloined Hubcap, Oregon, holds sealed-bid used-car auctions every Wednesday. Each car is so highest bidder at the second-highest bidder's bid. On average, 2/3 of the cars that are auctioned are lemons and 1/3 are good used ca good used car is worth $2,700 to any buyer. A lemon is worth $240 to any buyer. Most buyers can do no better than picking at rande among these used cars. The only exception is Al Crankcase. Recall that Al can sometimes detect lemons by tasting the oil on the can dipstick. A good car never fails Al's test, but half of the lemons fail his test. Al attends every auction, licks every dipstick, and bids h expected value of every car given the results of his test. Al will bid Select one: O A. $1,350 for cars that pass his test and $900 for cars that fail his test. Normal bidders will get only lemons. O B. $900 for cars that pass his test and $240 for cars that fail his test. Normal bidders will get good cars only 1/6 of the time. O C. S1,470 for cars that pass his test and $240 for cars that fail his test. Normal bidders will get only lemons. O D. $480 for cars that pass his test and $240 for cars that fail his test. Normal bidders will get good cars only 1/12 of the time. E. $1.060 for cars that pass his test and $340 for cars that fail his test. Normal bidders will get good cars only 1/6 of the time.

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 2MC