Final answer:
Before setting up a contract, full knowledge of the product's price and quality is essential. Imperfect information can hinder price agreement, and reassurances like warranties and service contracts help overcome this obstacle.
Step-by-step explanation:
The first thing to know before setting up a contract between a buyer and seller is the importance of having full information about the product's price and quality.
When there is imperfect information, it can be difficult for both parties to agree on a price, as the buyer may not understand the true value of the product, leading to a possible breakdown in negotiations. Sellers can reassure buyers by providing warranties or service contracts, which indicate a commitment to the product's performance and provide a level of security to the buyer.
Imperfect information leads to challenges in reaching market equilibrium because neither party has a complete understanding of what is being transacted. To address this, sellers may offer a warranty or a service contract.
A warranty is a promise to fix or replace the product within a certain time frame, and service contracts extend this promise by offering repairs for any problems that arise for a set period, often at an additional cost. These assurances can mitigate the risk associated with imperfect information and help facilitate a successful transaction.