Question

Suppose that Sven has a VW Cabrio that he would like to sell. Unfortunately, the speedometer on the car is broken and in need of repair. Sven is accustomed to driving the car in this condition, and it is worth $3,000 to him - fixed or not. Sven would like to sell the car to move up to something with a little more muscle. Jeff - and only Jeff - is willing to buy the car for $3,500 as-is or for $4,500 if the speedometer is fixed. Both Sven and Jeff know each other’s values and that they can get the car repaired at cost by Passport Motors for $600.

a. Sven is thinking about having the car fixed before he sells it. What problem might Sven run into if he has the car fixed first?

b. What are two ways that Sven could avoid this problem?

c. From the point of view of society (i.e. maximizing total surplus) does it matter if the car is sold? Why or why not?

Answer 1