Suppose that cars of different qualities have different probabilities of engine failure within a given time period,
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Suppose that cars of different qualities have different probabilities of engine failure within a given time period, and that these differences are reflected in their values of 0, $5, and $10. Suppose the failure probability is 0.1 for the q1 quality car, 0.5 for the q2 quality car, and 1 for the q3 quality car. Do warranties have a role to play in this market?
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To prevent market failure the sellers of better cars must somehow distinguish themselves from the sellers of lower quality cars One way to do this would be with warranties or guarantees The seller of ...View the full answer
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Related Book For 
Contemporary Financial Intermediation
ISBN: 9780124052086
4th Edition
Authors: Stuart I. Greenbaum, Anjan V. Thakor, Arnoud Boot
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