Bill sees a classified ad offering a used DVD player for $5. On the opposite pag

Question

Bill sees a classified ad offering a used DVD player for $5. On the opposite page, he sees a big color ad from a national electronics chain offering new DVD players for $50. Bill values a DVD player at $75 so long as it works, regardless of whether it is new or used. 5.3. Suppose Al knows the machine works well. He thinks about asking $20 and offering a guarantee: He'll replace his DVD player with a new $50 DVD player if his turns out not to work. Then he thinks, "That's not a good idea! Someone will just buy it, scratch it up, pretend it doesn't work, and get a new DVD player for $20--meanwhile, I'll be out $30!" Al's line of reasoning regarding his potential buyer reflects the principle of: A. Moral hazard B. Signaling C. Adverse selection

Explanation / Answer

B. Signaling

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