Write an equation representing expected value of buying car

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Reference no: EM132208341

Question: Expected Utility/Uncertainty

Suppose there are two types of cars High and Low quality

Low Quality cars sell for between $5,000 and $10,000,

High Quality cars sell for between $15,000 and $20,000.

[Hint: $5,000 = minimum seller is willing to accept (WTA) for low quality car, 10k= maximum buyer willing to pay (WTP) for low quality car. A similar hint applies for the high quality car.]

Suppose the proportion of high quality cars is p. Assume all buyers/sellers are risk neutral.

a) Write an equation representing the Expected Value (EV) of buying a car

b) If the proportion of cars that are high quality is 0.2, would there be a market for

b i) High quality cars? Justify your answer in terms of sellers' willingness to accept & buyers EV

b ii) Low quality cars? Justify your answer in terms of sellers' willingness to accept & buyers EV

c) If the proportion of cars that are high quality is 0.8, would there be a market for

c i) High quality cars? Justify your answer in terms of sellers' willingness to accept & buyers EV

c ii) Low quality cars? Justify your answer in terms of sellers' willingness to accept & buyers EV

d) What proportion of cars can be low quality before all of the good quality cars get crowded out of the market?

Reference no: EM132208341

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