If someone understands this question, it would be great if they can explain the logic behind the correct answer. Two types of cars are for sale: those with engine problems and those without. In all other respects, they are identical. Cars without engine problems are worth $20 000, while those with cracked foundations are worth $10 000 (minus $5000 to fix the problems, or $5000). The frequency of cars without engine problem is 80 per cent. Sellers know which type of house they have, but buyers cannot detect any problems. No seller ?must' sell their car and thus no one accepts anything less than its value. The long-run equilibrium in the car market is: Correct Answer: 100 per cent cars with engine problems and a reservation price of $19 500.
This question was answered on: May 23, 2022
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