Use the following information for questions
There are three types of cars, the good G, the bad B, and the ugly U.A G car is worth $30, a B car is worth $15, and a U car is worth $0.A buyer cannot distinguish the quality of cars offered for sale, but the seller does.If there is equal probability of a car being G, B, or U,
-which car is offered for sale in equilibrium and at what price?
A)B and U, at a price = $15.
B)U only, at a price = $15.
C)U only, at a price = $0.
D)All cars will be offered for sale, at a price = $30.
E)No cars will be offered for sale.

Question

Use the following information for questions 
There are three types of cars, the good G, the bad B, and the ugly U.A G car is worth $30, a B car is worth $15, and a U car is worth $0.A buyer cannot distinguish the quality of cars offered for sale, but the seller does.If there is equal probability of a car being G, B, or U,
-which car is offered for sale in equilibrium and at what price?
A)B and U, at a price = $15.
B)U only, at a price = $15.
C)U only, at a price = $0.
D)All cars will be offered for sale, at a price = $30.
E)No cars will be offered for sale.

Quizplus · Accepted Answer

In equilibrium, sellers will only offer U cars for sale at a price of $0. This is because if they offer a G or B car for sale, the buyer cannot distinguish between them, and will only be willing to pay the expected value of the car, which is $15 (($30 + $15 + $0)/3). Thus, the seller would receive no extra profit for offering a G or B car, and would only incur the cost of giving up their higher-valued car. On the other hand, by offering a U car for sale, the seller will receive the full expected value of $15 as profit, since this is the only car the buyer is willing to pay for at a price of $0. Therefore, in equilibrium, only U cars will be offered for sale at a price of $0.

Use the Following Information for Questions