Suppose Joe has a two-year old Honda Civic that's in excellent condition and that he would be willing to sell for $13,000. Lauren, who is risk-neutral, is considering whether to buy Joe's car. She's willing to pay $14,000 for a two-year Honda Civic that's in excellent condition and only $10,000 for one that's not in excellent condition. Lauren cannot tell whether Joe's car is in excellent condition. She believes that only 20 percent of two-year old Hondas for sale in the market are in excellent condition and that the other 80 percent are not in excellent condition. If other people who own two-year Honda Civics in excellent condition are like Joe, and other buyers in the market are like Lauren, then which of the following is likely to occur in the long run?
A. The sales price of two-year old Hondas will not change.
B. The quality of two-year old Honda Civics offered for sale will rise.
C. The sales price of two-year old Hondas will rise.
D. The quality of two-year old Honda Civics offered for sale will fall.
Answer: D
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