4. Your product fails about 2% of the time, on average. Some customers purchase
ID: 1097448 • Letter: 4
Question
4. Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Would you want to price the extended warranty at 2% of the product price? Discuss both moral hazard and adverse selection issues. 4. Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Would you want to price the extended warranty at 2% of the product price? Discuss both moral hazard and adverse selection issues.Explanation / Answer
Ans. The product fails about 2% of the time but this probability rate is probably affected by usercare. We could face adverse selection in that those who tend to use the product inappropriatelyare more likely to purchase.
We could face moral hazard in that, once users know they areinsured, they will tend to use the product less carefully. In either case, the claim rate will exceed2% and we will lose money
Related Questions
Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.