question archive Suppose you're in the market for a new sedan
Subject:MarketingPrice:4.88 Bought18
Suppose you're in the market for a new sedan. If the car is a "lemon", it will be worth $15,000. If the car is a "peach", it will be worth $25,000.
A. If you think half the sedans on the lot are "lemons", what should you be willing to pay for a new sedan?
B. If you think 60% of the sedans on the lot are "lemons", what should you be willing to pay for a new sedan?
C. If you think 80% of the sedans on the lot are "lemons", what should you be willing to pay for a new sedan?
A) The amount you are willing to pay is the expected value of a new sedan. The expected value is the average of the value of the car if it is lemon and the value of the car if it is a peach, weighted by the probability of a lemon (and peach). If half of the sedans are lemons (50%), then the most you are willing to pay for a new sedan is:
B) If you think 60% of the sedans are lemons, then the amount you are willing to pay is:
C) If you think 80% of the sedans are lemons, then the amount you are willing to pay is: