There is a seller and a buyer of a used car. The seller knows the car is a plum or a lemon. The buyer knows that the probability of a plum is 0.7 and the probability of a lemon is 0.3. Assume the seller and buyer have identical tastes. Plums have a quality value of $20,000 and lemons have a quality value of $10,000. (i) What is the expected value of the car? Given your answer, how will the buyer be informed whether the car is plum or a lemon? (ii) What would Akerlof’ s Lemons model predict to be the final outcomes of this seller-buyer game? That is, what car will be sold in the market and for how much?
There is a seller and a buyer of a used car. The seller knows the car is a plum or a lemon. The buyer knows that the probability of a plum is 0.7 and the probability of a lemon is 0.3. Assume the seller and buyer have identical tastes. Plums have a quality value of $20,000 and lemons have a quality value of $10,000. (i) What is the expected value of the car? Given your answer, how will the buyer be informed whether the car is plum or a lemon? (ii) What would Akerlof’ s Lemons model predict to be the final outcomes of this seller-buyer game? That is, what car will be sold in the market and for how much?
Chapter8: Sequences, Series,and Probability
Section8.7: Probability
Problem 50E: Flexible Work Hours In a recent survey, people were asked whether they would prefer to work flexible...
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There is a seller and a buyer of a used car. The seller knows the car is a plum or a lemon. The buyer knows that the probability of a plum is 0.7 and the probability of a lemon is 0.3. Assume the seller and buyer have identical tastes. Plums have a quality value of $20,000 and lemons have a quality value of $10,000.
(i) What is the expected value of the car? Given your answer, how will the buyer be informed whether the car is plum or a lemon?
(ii) What would Akerlof’ s Lemons model predict to be the final outcomes of this seller-buyer game? That is, what car will be sold in the market and for how much?
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