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)3,0002,500Suppose that both buyers and sellers observe the quality. What happens?

A. Only good cars are traded.
B. Only bad cars are traded.
C. Neither good nor bad cars are traded.
D. Both good and bad cars are traded.


Answer: D

Economics

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