Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 5

A computer manufacturer offers an optional extended warranty on the laptops it sells. What signal does the fact that the manufacturer offers this warranty send to potential consumers about laptop quality? Does this reduce consumers 'incentives to purchase the extended warranty? Suppose consumers are of two types, heavy users who travel with laptops, exposing them to the risk of accidental damage, and light users. Explain how market forces may lead the price of the extended warranty to reflect the heavy users' risk of damage rather than the average consumers'.