Scenario: You walk into a used car lot to buy your first car. However, you are not sure of the quality of the cars in the lot and expect one-third of them to be of poor quality.
-Refer to the scenario above.You are eager to pay $10,000 for a good-quality car but $0 for a poor-quality car.Suppose you decide to buy a Toyota Corolla that the car dealer values at $8,500.What is the most that you would be willing to pay for the car?
A) $3,000.50
B) $6,666.67
C) $10,000
D) $5,000

Question

Quizplus · Accepted Answer

If one-third of the cars are of poor quality, we can assume that there is a 2 in 3 chance (or a 67% chance) that the car you want to buy is of good quality. Therefore, you are willing to pay $10,000 for a good-quality car, but there is a 33% chance that you will receive a poor-quality car, for which you are willing to pay $0. This means that the most you are willing to pay for the car considering the probability of getting a good or poor-quality car is:

($10,000 x 2/3) + ($0 x 1/3) = $6,666.67

Scenario: You Walk into a Used Car Lot to Buy