Which of the following are potential problems faced by a firm that wants to provide warranties for its lawnmowers? (Select all that apply.)
a. A moral hazard problem might arise, in that homeowners may be less careful with the mower, since they can always return it if it breaks.
b. The warranty may select for homeowners that don't have a lot of mowing to do, or have smooth lawns, because they won't have to pay as much for a warranty.
c. The warranty will increase demand by assuring customers of the product's quality.
d. The warranty will reduce demand because only makers of low-quality goods would need to reassure consumers in this way.
Question 2
Which is a distortion (a loss of social surplus) associated with a monopolist's inability to observe consumer types when constructing a nonlinear pricing scheme?
a. The monopolist must expend more resources on market research.
b. All bundles involve inefficiently low quantities.
c. Some but not all bundles involve inefficiently low quantities.
d. Quantities aren't distorted, but prices extract too much consumer surplus.
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