Question
Bay Center Implement, Co., the long-time sole dealer of farm machinery in Bay City, sells only unreliable tractors that frequently break down. Having found a
Bay Center Implement, Co., the long-time sole dealer of farm machinery in Bay City, sells only unreliable tractors that frequently break down. Having found a way of successfully selling high quality cars, Peters Car Sales has just entered the machinery market to sell only reliable used tractors. The value of each of these kinds of tractors to a farmer and the wholesale cost of obtaining them are as follows:
In the absence of any quality signals, predict the long-run equilibrium values of each of the following items:
Car Type | Value to Farmer | Wholesale Cost |
Reliable | $100,000 | $70,000 |
Unreliable | $60,000 | $40,000 |
1. What will be the price of a used tractor?
2. What will be Peter's profit per tractor?
3. What will be Bay Center's Profit per Tractor?
4. Now suppose Peter plans to use a warranty (i.e., be financially responsible for all repairs over a specified period) to signal the quality of his merchandise. If the costs of a Y-year warranty for reliable and unreliable tractors are CR(Y) = 4,000Y and CU(Y) = 10,000Y, respectively, what is the minimum warranty length that will successfully distinguish the two types of tractors?
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