Suppose there are two firms that sell surfboards - Firm A and Firm B. Firm A produces high quality boards at a cost of MCA = $1,000. Firm B produces low quality boards at a cost of MCB = $400. Consumers are willing to pay $1,300 for a high-quality board and $500 for a low-quality board. If both firms choose to participate in the market, they will have equal market share. Use this information to answer questions #7 and #8. 7. If consumers are unable to observe the quality of a surfboard before purchasing, a. There will be market failure due to adverse selection. b. There will be market failure due to moral hazard. c. There will not be any market failure. d. The price of high-quality surf boards will increase due to adverse selection. e. The price of low-quality surf boards will increase due to moral hazard. 8. The firms consider offering a warranty to signal the quality of their surfboards. In order for the warranty to serve as a credible signal of quality, a. both firms must choose to offer the warranty. b. the cost of providing a warranty must be lower for Firm A than for Firm B. c. consumers must be willing to pay for a warranty on their surf boards. d. the cost of providing a warranty must be higher for Firm A than for Firm B. e. consumers must be risk averse.
Suppose there are two firms that sell surfboards - Firm A and Firm B. Firm A produces high quality boards at a cost of MCA = $1,000. Firm B produces low quality boards at a cost of MCB = $400. Consumers are willing to pay $1,300 for a high-quality board and $500 for a low-quality board. If both firms choose to participate in the market, they will have equal market share. Use this information to answer questions #7 and #8. 7. If consumers are unable to observe the quality of a surfboard before purchasing, a. There will be market failure due to adverse selection. b. There will be market failure due to moral hazard. c. There will not be any market failure. d. The price of high-quality surf boards will increase due to adverse selection. e. The price of low-quality surf boards will increase due to moral hazard. 8. The firms consider offering a warranty to signal the quality of their surfboards. In order for the warranty to serve as a credible signal of quality, a. both firms must choose to offer the warranty. b. the cost of providing a warranty must be lower for Firm A than for Firm B. c. consumers must be willing to pay for a warranty on their surf boards. d. the cost of providing a warranty must be higher for Firm A than for Firm B. e. consumers must be risk averse.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Q8
Transcribed Image Text:Suppose there are two firms that sell surfboards Firm A and Firm B. Firm A produces high quality boards at a
cost of MCA = $1,000. Firm B produces low quality boards at a cost of MCB = $400. Consumers are willing to
pay $1,300 for a high-quality board and $500 for a low-quality board. If both firms choose to participate in the
market, they will have equal market share. Use this information to answer questions #7 and #8.
7. If consumers are unable to observe the quality of a surfboard before purchasing,
a.
There will be market failure due to adverse selection.
b. There will be market failure due to moral hazard.
There will not be any market failure.
d. The price of high-quality surf boards will increase due to adverse selection.
The price of low-quality surf boards will increase due to moral hazard.
с.
е.
8. The firms consider offering a warranty to signal the quality of their surfboards. In order for the warranty to
serve as a credible signal of quality,
both firms must choose to offer the warranty.
b. the cost of providing a warranty must be lower for Firm A than for Firm B.
consumers must be willing to pay for a warranty on their surf boards.
d. the cost of providing a warranty must be higher for Firm A than for Firm B.
consumers must be risk averse.
а.
с.
е.
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