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 CarsBuyer's ValuationSeller's ValuationGood (50% probability)5,0004,500Bad (50% probability)3,0002,500When a buyer does not observe the quality, what is the highest price she will offer for a used car if she ignores adverse selection?
A. $4,500
B. $4,000
C. $2,500
D. $3,000
Answer: B
Economics
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