Suppose there are three types of used cars that consumers are willing to purchase: “Good”; “OK”; and “Bad”. Consumers are willing to pay $10,000 for a Good car, and because they will require more work, consumers are willing to pay $7,000 for an OK car, and $3,000 for a Bad car. All types of car appear identical to consumers—the only differences are with regard to latent mechanical and electronic attributes that can be detected only by an expert. Although there is no way for consumers to determine the type of car they are purchasing before they purchase, all consumers know that 50% of used cars are Good, 25% are OK, and 25% are Bad. Further, consumers will be able to determine what type of car they have purchased after owning the car for 3 months.
The attached table describes the minimum price that sellers of different types of cars are willing to accept from a buyer. Suppose that a car seller can purchase a report that credibly reveals the true type of their car for $300. Who will purchase this report?
A) Bad car sellers only
B) Good car sellers only
C) Good and OK car sellers only
D) All car sellers (Good, OK, and Bad)
E) No car sellers
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