You are the marketing manager at KENT RIDGE WASHERS Co. which imports washing machines to sell in the domestic market.

You have two import sources: White Ltd and Clean Ltd. All machines imported from White Ltd are of 'superior' quality which costs you $300 per each to import. And machines imported from Clean Ltd are of 'normal' quality which costs you $200 per each to import.

Consumers believe that the quality of a machine is either 'superior' or 'normal' with 50-50 chance but cannot tell which one is of which type because the import source is not revealed to the consumers. Consumers would not trust you, either, even if you tell them which machine was imported from which source. If consumers are sure about the true quality of the machines, however, they are willing to pay $800 for a 'superior' washing machine but only $300 for a 'normal' machine.

Realizing that a socially undesirable market outcome might be likely, the Fair Business Committee (FBC) in the government requires you to sell the product with the seller warranty. And the FBC issues 'Superior' sticker for a machine that sells with N year or longer warranty, and it issues 'Normal' sticker otherwise. The FBC being a government organization, consumers judge the quality of machines by looking at the stickers.

Once you issue a warranty, you are responsible for the repair cost during the warranty period in case the machines are defective: your annual average repair cost of a washing machine is expected to be $50 for White's machines and $100 for Clean's machines. (The time value of money to you and consumers is to be ignored.)

Answer the following questions. Show your reasoning briefly.

(1) (5 marks) Explain what FBC's concern would be and why.