You are in the market for a used 2006 Honda Accord. You know that half of the 20

Question

You are in the market for a used 2006 Honda Accord. You know that half of the 2006 Accords are lemons and half are peaches. If you could be assured that the Accord you were buying were a peach, you would be willing to pay up to $10,000. On the other hand, you would only be willing to pay $2,000 for a lemon. You have no ability to discern whether any particular Accord is a lemon or a peach. Sellers of Accords, on the other hand, are likely to know whether their particular car is a lemon or a peach. Suppose sellers of lemons will sell their cars for $1,500 or more and peach sellers will beling to sell their cars for $8,500 or more. Over time the price in the market for 2006 Accords will and will be traded. 0 A. be between $8,500 and $10,000, only peaches O B. be between $1,500 and $2,000 for lemons, only lemons ° C. be between $8,500 and $10,000 for peaches and between $1,500 and $2,000 for lemons; both lemons and peaches 0 D. be between $1,500 and $10,000, both lemons and peaches

Explanation / Answer

Ans is B

Expected pay=0.5(2000)+0.5(10000)=6000

At this price, no peach car owner will be selling and thus in market only lemon cars will be available.

Thus final price will be in between 1500-2000 and only lemon will be traded

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