Used car buyers will believe that a car is of good quality when ...

[formula1]

Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when
 
  A) a warranty on a lemon is costly to the seller.
  B) warranties are offered on all cars.
  C) warranties are only offered on lemons.
  D) a warranty on a good car is a false signal.

Question 2

Explain how product liability laws can reduce adverse selection.
 
  What will be an ideal response?

[ergserg]

Answer to Question 1

A

Answer to Question 2

Product liability laws force producers to compensate consumers that purchase a defective product. This eliminates the producer's ability to profit from asymmetric information.