Suppose all the producers sell toasters through Wal-Mart, and WalMart lets producers choose from 2 options. With Option A, a producer sells a toaster at $49 but has to offer a free warranty to the consumer. With Option B, a producer sells a toaster at $10 without any warranty. A free warranty means that if a customer's toaster breaks, then she can return it and the producer must give her a full refund. (The returned good is of no use to anyone and will be dumped.) a. Which option will a low-quality producer choose, A or B? Justify numerically. b. Which option will a high-quality producer choose, A or B? Justify numerically. c. Will offering a free warranty send a useful signal to the consumer in this case? Why?

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Producer Choices Warranty vs No Warranty a Lowquality toaster producer Option B No Warranty A lowquality toaster producer makes toasters that are more ... View the full answer