You are in the market for a used car and decide to visit a used car dealership. You know that the Blue Book value of the car you are looking at is between $14,000 and $18,000.
You are in the market for a used car and decide to visit a used car dealership. You know that the Blue Book value of the car you are looking at is between $14,000 and $18,000.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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3. You are in the market for a used car and decide to visit a used car dealership. You
know that the Blue Book value of the car you are looking at is between $14,000 and
$18,000.
a. If you believe the dealer knows as much about the car as you do, how much are
you willing to pay? Why? Assume that you care only about the expected value of
the car you will buy and that the car values are symmetrically distributed.
b. Now you believe the dealer knows more about the car than you do. How much are
you willing to pay? Why? How can this asymmetric information problem be
resolved in a competitive market?
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