There are two used car dealerships in South Park, Colorado. Clyde's Cars is a company which...

 

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There are two used car dealerships in South Park, Colorado. Clyde's Cars is a company which aims to buy and sell low quality cars (aka "lemons") without letting the customers know. * Stan's Cars is a company which aims to buy and sell high quality cars (aka "peaches") While the cost of a low quality used car for a dealership is $14,000, the cost of a high quality used car is $18,000. The sale price of a high quality used car is $22,600 and the sale price of a low quality used car is $17,200 in the market. Unfortunately, the customers cannot tell if a car is high or low quality without driving it for a few weeks. That is why unless car dealers signal the quality of their used cars, customers will only pay the average of the high and low quality sale prices. Stan knows that one way to signal the quality of a car is to offer a certain period of warranty with the car. Because the cars he is selling are high quality, the cost of offering warranty for a year is $550 for him. On the other hand, Clyde is interested in selling low quality cars and offering the same warranty costs $1,250 for a year for Clyde. a) (4 points) If Stan offers a two-year warranty, should Clyde replicate Stan's strategy? b) (3 points) How many years of warranty should Stan offer to signal his cars' quality without Clyde replicating the strategy? c) (4 points) What is the range of warranty years that allow Stan to benefit from signalling high quality? There are two used car dealerships in South Park, Colorado. Clyde's Cars is a company which aims to buy and sell low quality cars (aka "lemons") without letting the customers know. * Stan's Cars is a company which aims to buy and sell high quality cars (aka "peaches") While the cost of a low quality used car for a dealership is $14,000, the cost of a high quality used car is $18,000. The sale price of a high quality used car is $22,600 and the sale price of a low quality used car is $17,200 in the market. Unfortunately, the customers cannot tell if a car is high or low quality without driving it for a few weeks. That is why unless car dealers signal the quality of their used cars, customers will only pay the average of the high and low quality sale prices. Stan knows that one way to signal the quality of a car is to offer a certain period of warranty with the car. Because the cars he is selling are high quality, the cost of offering warranty for a year is $550 for him. On the other hand, Clyde is interested in selling low quality cars and offering the same warranty costs $1,250 for a year for Clyde. a) (4 points) If Stan offers a two-year warranty, should Clyde replicate Stan's strategy? b) (3 points) How many years of warranty should Stan offer to signal his cars' quality without Clyde replicating the strategy? c) (4 points) What is the range of warranty years that allow Stan to benefit from signalling high quality?

Answer rating: 100% (QA)

a No Clyde should not increase his warranty for an another year ... View the full answer