Question

You are in the market for a used 2012 Honda Accord. You know that 50% of the 2012 Accords are lemons and 50% are of high quality. If you could be assured that the Accord you were buying was of high quality, you would be willing to pay up to $14,000. On the other hand, you would only be willing to pay $6,000 for a lemon. You have no ability to discern whether any particular Accord is a lemon or of high quality. Sellers of Accords, on the other hand, are likely to know whether their particular car is a lemon or high quality. Suppose sellers of lemons will sell their cars for $6,500 or more and high quality car sellers will be willing to sell their cars for $12,500 or more. If you are risk neutral, you are willing to offer ________ and ________ are willing to sell you their car.

		a. $9,500 for a car of unknown quality; lemon owners only
		b. $6,000 for a car of unknown quality; lemon owners only
		c. $10,000 for a car of unknown quality; lemon owners only
		d. $9,500 for a car of unknown quality; both lemon and peach owners Stacy is investing $60,000 for a used machine. The investment is expected to yield $18,650 in benefits each year for the next four years. If the market interest rate is 8 percent, calculate the return on investment using the Net Present Value method (5 points)

Answer 1

Q1 Since 50% are high quality cars and 50% are lemon cars and since the consumers are not able to distinguish between the two therefore they are expected to pay 0.5*14000+0.5*6000 = 7000+3000 = $10,000

At $10,000 only lemon car sellers are willing to sell their cars.

So, the right option is (c) $10,000 for a car of unknown quality; lemon owners only.

Q2.