Heya, the answer for question one is 650 but could you help me with q2 and q3? tqvm.

Jim has a used car that is worth between 0 and 2000 pounds (an equal chance of each price in between). Doug is thinking of buying the car and knows it is worth 35% more to him than to Jim. Doug can make a take-it-or-leave-it offer to Jim. How much should Doug offer Jim? Above which value of how much more the car is worth to Doug than Jim would your answer in part A change? Please write your answer in terms of a percentage more, that is, x% more. What price should Doug offer Jim if the percentage exceeds that from your answer in (ii)?

Expert Answer

I’m not sure the answer to the first part is 650.

i) The buyer will be willing to pay 35% more than the expected worth for the seller (1000 pounds). i.e. the buyer will be willing to pay 1350 pounds. But then the actual cars having worth more than 1350, will be out of the market as the seller cannot sell those at 1350. So, now the expected worth for the seller will be 1350*1/2 = 675. So, the buyer will be willing to pay 675*1.35 = 911.25. Hence the cars having actual worth more than 911.25 will disappear from the market. In this way, the willingness of the seller will reduce and reach to ‘zero’ ultimately. So, my answer to part (i) is ‘zero’.

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ii) Now when the buyer has a willingness to paying an amount 2000 pounds, the seller should not take out any product out of the market. So, how much more it worth?

(Worth for the buyer – Expected worth of the seller) / Expected worth of the seller * 100%

= (2000 – 1000) / 1000 = 200%

iii) As per the above logic, Doug should offer anything more than 2000 pounds.

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