4. Suppose there are two firms selling mobile phones along Luthuli Avenue. Firm I sells high quality phones. It cost firm 1 Kshs. 10,000 to buy an average phone. Firm 2 sells low quality phones. It costs firm 2 an average of 6,000 to buy its phones. Consumers will on average be willing to pay 14,000 for high quality phones and 10, 000 for low quality phones. The cost of warranty for the high cost seller is 200t while the cost of warranty for the low cost seller is 1200t where t is the warranty year. i) Which firm would want to signal quality of its phone? Explain ii) What t should the high quality seller set to prevent the low quality seller from matching his offer?

4. Suppose there are two firms selling mobile phones along Luthuli Avenue. Firm I sells high quality phones. It cost firm 1 Kshs. 10,000 to buy an average phone. Firm 2 sells low quality phones. It costs firm 2 an average of 6,000 to buy its phones. Consumers will on average be willing to pay 14,000 for high quality phones and 10, 000 for low quality phones. The cost of warranty for the high cost seller is 200t while the cost of warranty for the low cost seller is 1200t where t is the warranty year. i) Which firm would want to signal quality of its phone? Explain ii) What t should the high quality seller set to prevent the low quality seller from matching his offer?

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter5: Elastic And Its Application

Section: Chapter Questions

Problem 10PA

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