Ted went to the market to buy Good X. He was willing to pay up to ...

[tichca]

Ted went to the market to buy Good X. He was willing to pay up to 2.50 per unit of the good.
 
  However, he expected some units of the good to be defective. Therefore, when the seller asked for a price of 2.30 per unit, he refused to pay more than 2 for each unit. If the seller knows which units of the good are defective, what is most likely to happen in this case?

Question 2

Refer to the figure above. What is the consumer surplus when Lithasia opens up to free trade?
 
  A) 155
  B) 215
  C) 245
  D) 325

[Edwyer]

Answer to Question 1

Ted valued each unit of Good X at 2.50, while the seller valued it at 2.30. If Ted had perfect information about the quality of the good, trade would have taken place at a price between 2.30 and 2.50. However, because Ted was unaware of the quality of the good and had a lower value for defective units of the good, he was willing to pay only 2 per unit. At 2, the seller would not be willing to give him good units of the good because he he had a higher value for those units. As a result, Ted would end up buying defective units of Good X. Such a phenomenon is commonly known as adverse selection.

Answer to Question 2

C

[tichca]

TYSM

[FergA]

Excellent