Suppose that 85% of sellers have low-quality cars. assume buyers know that 85% of sellers have low-quality cars but are unable to determine the quality of individual cars.

Expected value of car is the sum of the probability of getting a low-Q car multiplied by the value of a low-Q car and the probability of getting a high-Q car multiplied by the value of a high-Q car.

== (chance of HQ car * $9,500)+
(chance of LQ car * $5,500)

== (0.15 * $9,500) + (0.85 * $5,500)

== $ 6,100

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Tundexi Tundexi · Answer 2 · 2022-05-12T12:31:27+02:00

The expected value of a car to a buyer if there is no way to know if the car is high-quality plum or a low-quality lemon will be $6,100.

How is the Expected value of car derived?

This will be calculated by getting the sum of the probability of getting a low-Q car * value of a low-Q car and probability of getting a high-Q car * the value of a high-Q car.

Expected value of car = (Chance of HQ car * $9,500) + (chance of LQ car * $5,500)

Expected value of car = (0.15 * $9,500) + (0.85 * $5,500)

Expected value of car = $ 6,100

Therefore, the expected value of a car to a buyer will be $6,100.

Missing words "If all sellers offer their cars for sale and buyers have no way of determining whether a car is a high-quality plum or a low-quality lemon, the expected value of a car to a buyer is ---"