1.A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms. One firm produces an unreliable product and the other a reliable product. At the time of the sale, the consumer is unable to distinguish between the two firms' products. From the consumer's perspective, there is an equal chance that a given firm's product is reliable or unreliable. The maximum amount this consumer will pay for an unreliable product is $0, while she will pay $50 for a reliable product.

a. The maximum amount this consumer will pay for an unreliable product is $0, while she will pay $50 for a reliable product.

b. How much will this consumer be willing to pay for the product if the firm offering the reliable product includes a warranty that will protect the consumer? Explain

2.The text points out that asymmetric information can have deleterious effects on market outcomes.

a. Explain how asymmetric information about a hidden action or a hidden characteristic can lead to moral hazard or adverse selection.

b. Discuss a few tactics that managers can use to overcome these problems.