Question
High quality boots that will last me many years cost $60 to make, and in a store I would be willing to pay $100 for
High quality boots that will last me many years cost $60 to make, and in a store I would be willing to pay $100 for them. Junky boots that fall apart quickly cost $30 to make, and in a store I would be willing to pay $40 for them. Next, imagine boot manufacturers can provide a warranty. With a warranty, I consider all the boots equally good (if they are crap, they will be replaced). Furthermore, assume the quality boots are so good that offering a warranty on them costs nothing - no customer is ever unhappy. If a warranty is offered on the crappy boots, though, the manufacturer will have many claims. If we measure the cost of providing a warranty on crappy boots in dollars, over what range of costs will we see a pooling or separating equilibrium in the hiking boots market? (For example: If the crappy boots warranty costs $0-$300 to provide it will be a separating equilibrium, $301- $350 pooling, $351-$500 separating, over $500 pooling. Or vice versa, a different number of ranges to consider, etc.)
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