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A warranty is a contract specifying that the seller will pay to the buyer $1000 , the cost of repairing the acquired joint, in the
A warranty is a contract specifying that the seller will pay to the buyer $1000 , the cost of repairing the acquired joint, in the event that it breaks. If a joint for sale has a warranty, the buyer does not care whether the joint is defective or perfect (since in the events that it breaks, the joint will be repaired at no cost). Issuing a warranty costs a firm $100 of (administrative) cost per unit under warranty. In addition, a firm that has issued a warranty must pay $1000 to repair any joint they sell which breaks. It is known to the buyer (and of course to the seller) whether or not a joint has a warranty. (e) [2 points] For a joint with warranty, what would willingness to sell (WTS) be for a low quality firm? What would WTS be for a high quality firm selling a joint with warranty? (f) [3 pointa] Buyers cannot distinguish between perfect and defective joints but they are sophisticated: they understand the supply curve and the quality of the joints for sale at different prices and they know if a joint comes with or without a warranty. Explain what is going to happen in the joint market when warranties are possible. Which firms (if any) will supply joints that come with a warranty? Which firms (if any) will supply joints that do not come with a warranty? What are the equilibrium prices and quantities of joints with and without a warranty? What are the profits of high and low quality firms? Who gains from the introduction of warranties and how much do they gain
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