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

A) $1,500.
B) $1,000.
C) $500
D) $1,000
E) $2,000

Question

Charnjot singh · Accepted Answer

Final Answer : D, Explanation :  If an owner's car is worth less than $1,000, they will not bother paying the $500 fee to have the car appraised since they will not receive a profit after paying the fee.If an owner's car is worth $1,000 or more, they will pay the fee and have their car appraised. If the appraised value of the car is less than $1,000, the owner will choose to sell the car unappraised since they can receive a higher profit. However, if the appraised value of the car is $1,000 or more, the owner will choose to sell the car appraised since they can receive a higher profit even after paying the appraisal fee.Therefore, the equilibrium point is at $1,000, where owners with cars worth less than $1,000 will sell their cars unappraised and owners with cars worth $1,000 or more will pay for the appraisal and sell the car appraised.

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