Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 19, Problem 5MC
To determine
An example of signal.
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Imagine a market for used computers. There are two types of computers: good and bad. Also imagine that there are 50% of each on the market.
Buyers can imagine paying 5,000 for a good computer and 1,000 for a bad computer
Sellers want at least 4000 for a good computer and 1500 for a bad computer
Assume that the buyer thinks that there is a 50% probability that the computer is of poor quality. What is the expected value and price of a computer that the buyer most wants to pay?
One method of solving this problem is through signaling. Signaling is a strategy one uses when they have information. The goal is to use a signal to convince the buyer that the good or service that is being sold is quality and will meet the buyer's wants.
Offer an example of a company that uses a signal to help sell its product. What is the signal?
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Do you think the signal is effective? Why or why not?
Does this signal improve market efficiency? Why or why not?
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Managerial Economics: A Problem Solving Approach
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