Suppose that there are two types of cars, good and bad. The qualities of cars are not observable but are known to the sellers. Risk-neutral buyers and sellers have their own valuation of these two types of cars as follows:

When buyers do not observe the quality, what happens in the market?
a) Both good and bad cars are traded.
b) Only good cars are traded.
c) Only bad cars are traded.
d) Neither good nor bad cars are traded.

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Seller's Valuation Buyer's Valuation Types of Cars Good (50% probability) 5,000 4,500 Bad (50°% probability) 3,000 2,500