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. 5.4. Al is unable to sell Bill the DVD player because: I. Adverse selection can cause buyers not to buy high-quality goods because of uncertainty about their quality. II. Moral hazard can prevent sellers from offering guarantees of quality, because sellers can't be sure that buyers won't try to take advantage of the guarantees by filing false claims. A. II only B. I only C. Both I and II

Explanation / Answer

C. He should have asked $20 and sold it with a guarantee that he would replace it with a new DVD player if it turned out not to work. This is best opportunity for both sides of the deal. buyer receives switch-on warranty and seller receives profit, thus surplus for both will be maximized.

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