Suppose Joe Has a Two-Year Old Honda Civic That's in Excellent

Multiple Choice

Suppose Joe has a two-year old Honda Civic that's in excellent condition and that he would be willing to sell for $13,000. Lauren, who is risk-neutral, is considering whether to buy Joe's car. She's willing to pay $14,000 for a two-year Honda Civic that's in excellent condition and only $10,000 for one that's not in excellent condition. Lauren cannot tell whether Joe's car is in excellent condition. She believes that only 20 percent of two-year old Hondas for sale in the market are in excellent condition and that the other 80 percent are not in excellent condition. If Joe offers a warranty in which he makes a legally binding commitment to pay for any major repairs the car needs in the next 18 months, then this ________ serve a credible signal because ________.

A) will; it is more costly for people with low-quality cars to offer such a warranty
B) will; people who own cars that are in excellent condition are usually honest
C) will not; it is less costly for people with low-quality cars to offer such a warranty
D) will not; people who sell used cars are rarely honest