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1.) Your product fails about 2% of the time, on average. Some customers purchase

ID: 1194203 • Letter: 1

Question

1.) 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.

2.) Lightweight personal locator beacons are now available to hikers that make it easier for the Forest Service's rescue teams to locate those lost or in trouble in the wilderness. How will this affect the costs that the Forest Service incurs?

Explanation / Answer

Further, those who are careful would become careless after having warranty.

Hence, firm is definitely going to loss.

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