Suppose that everyone in a used-car example is risk neutral, potential car buyers value lemons at $750 and good used cars at $2 comma 800 , the reservation price of lemon owners is $250 , and the reservation price of owners of high-quality used cars is $1 comma 250. The share of current owners who have lemons is theta. For what values of theta do all the potential sellers sell their used cars? Describe the equilibrium. The most a risk-neutral buyer would be willing to pay for a car of unknown quality as a function of theta is pequals nothing. (Properly format your expression using the tools in the palette.)

Question

Business

Paulina Mills

28 January, 01:34

Suppose that everyone in a used-car example is risk neutral, potential car buyers value lemons at $750 and good used cars at $2 comma 800 , the reservation price of lemon owners is $250 , and the reservation price of owners of high-quality used cars is $1 comma 250. The share of current owners who have lemons is theta. For what values of theta do all the potential sellers sell their used cars? Describe the equilibrium. The most a risk-neutral buyer would be willing to pay for a car of unknown quality as a function of theta is pequals nothing. (Properly format your expression using the tools in the palette.)

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Answers (1)

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Chaim Pena · Answer 1

Theta<75.60%

Explanation:

P=$750*theta+$2,800 * (1-theta)

P = $750+$2,800-$2800theta

=$2,800-$2,050 (Price as a function of theta)

P>$1,250

$2,800-$2,050>$1,250

Thata< $1,550:$2,050

Theta<75.60%