Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 2,

Question

Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 2,000 used cars on the market is such that the number of used cars of value less than V is V/2. Original owners must sell their used cars. Original owners know what their cars are worth, but buyers can’t determine a car’s value until they buy it. An owner can either take his car to an appraiser and pay the appraiser $500 to appraise the car (accurately and credibly) or sell the car unappraised. In equilibrium, car owners will have their cars appraised if and only if their value is at least... (The question itself is to find out this "at least" amount, which is $1,000)

The answer is $1,000.

Could you provide a step-by-step solution. Thanks!

Explanation / Answer

Answer1:- In the question , the price which is willing to be paid is X+500

The number of cars lower than the quality = X/2 = 2000/2 = 1000

So the price of the car = 1000+500=$1500

AT this price level, all the owners will not be willing to sell their cars as there will be some owners who have better quality cars.

Only those owners who have the quality of cars less than $1500 will be selling their cars.

Answer:- buyers be willing to pay for a used car= X*/2 + 500

Cars worth less than X*/2 + 500 will be available for sale.

Answer;- The equation will be:- . X*/2+500 = X*

Answer :- X*+1000 =2 X*

X*=$1000

So the equilibrium value will be $1000

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