Question

41. Suppose Neha, the seller of the lawn mower, knows the mower is in good condition—she is only selling it because she has decided to replace her lawn with a new deck. She thinks about asking $45 and offering a guarantee: She will replace the lawn mower with a new $250 lawn mower if it turns out not to work. Then she thinks "That's not a good idea! Someone can just buy it, handle it carelessly, and, if it breaks, can pretend it didn't work and get a new lawn mower for $45—meanwhile, I'll be out $205!" This is an example of

Answer 1

In a goods market, offering a guarantee can be a promise of product quality that encourages sales, but risk of such guarantees being abused can deter sellers like Neha from offering them. Prices in the market can also influence buyer perceptions of quality, affecting sale quantities.

Step-by-step explanation:

The scenario with Neha considering to offer a guarantee on her lawn mower but being concerned about potential abuse is an example of the challenges faced in a goods market involving imperfect information and incentives. Offering a guarantee serves as a promise of quality, and can encourage purchases from customers who are unable to see the product beforehand, such as in online sales or mail-order catalogs. However, Neha's worry that customers might abuse the guarantee by claiming a perfectly good item is faulty to receive a more valuable replacement showcases the risk of offering a guarantee. This can lead to a type of market failure where a seller has to balance the benefits of attracting customers through promises of quality with the risks that such promises can be exploited unfairly.

In the greater context of the goods market, the price set by the seller may lead buyers to make assumptions about quality, influencing the equilibrium price and quantity. A too low price might suggest poor quality, deterring buyers, whereas a higher price may convey high quality, attracting more sales. This delicate balance illustrates the complexity of pricing strategies in markets where buyers and sellers have imperfect information about products.