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Suppose that in a used motorbike market, 50% of the motorbikes are good quality bikes...

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Accounting

Suppose that in a used motorbike market, 50% of the motorbikes are good quality bikes (and the remainder are bad quality ones) but buyers do not know which seller in the market owns good quality motorbikes. Suppose also that signalling the quality of the bike is possible via providing warranties for a certain number of years. The annual cost of warranty and the prices of the good and bad quality motorbikes are given below:

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a) How many years of warranty would good quality motorbike owners have to offer to credibly differentiate (separate) themselves from the owners of bad quality products, i.e. credibly signal their quality?

b) Is signaling profitable for the owners of good quality motorbikes in this case or would the owners of good quality bikes be better off without signaling? Show numerically and explain why.

Good Quality Motorbike Bad Quality Motorbike Cost of Inspection 150 300 Price of the Motorbike 1500 300

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