Assume there are equally many good and bad cars in the used car market. Buyers have a
Question:
Assume there are equally many good and bad cars in the used car market. Buyers have a WTP for good cars of $4000 and a WTP of $2000 for bad cars. Assume that WTS for owners of both types is low enough that all cars are sold no matter what else happens (so there is no adverse selection). Assume that buyers are risk neutral.
a) If buyers pay the expected WTP for a car, how much are sellers who know they have a good car willing to pay to accurately certify quality?
b) If the current market price of a car is $3000, how much are buyers willing to pay to certify quality after selecting a car but before paying for it? It may help you to think of part as a sequential game against nature, in which nature is playing a mixed strategy of 50% good car, 50% bad car while the car buyer is playing the strategy of either buying or not buying.
