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Adverse selection In the market for used cars there are good cars and bad cars ....
Question 2: Adverse selection 10 marks (1, 3, 3, 3) In the market for used cars there are good cars and bad cars. 0 The good cars comprise a fraction G of all the cars that may bepotentially up for sale, where 0<G<1. 0 Buyers cannot distinguish a good car from a bad car, whereas eachseller knows the type of car she has. 0 The valuation of good and bad cars by buyers and sellers are given inthe accompanying table. Bu ers 50 20".1. . All buyers are risk neutral. (3) Assuming that all cars are put up for sale, calculate the expected price thata buyer would be willing to pay. Expected price = (b) Suppose buyers pay this price. What is the minimum value of G for whichboth types of cars will be offered on the market? Show the reasoning.
