A bumper-to-bumper warranty on a used car is a signaling device that:
A) identifies a high-quality car as a high-quality car, because putting such a warranty on a low-quality car would be prohibitively costly.
B) disguises a low-quality car as a high-quality car, and thus makes it easier to sell.
C) is necessary in order to sell a low-quality car at all. Without it no one would risk buying the car.
D) isn't necessary if there is a mix of high-quality and low-quality cars in the market.
E) helps sellers determine whether the buyer is truly looking for a high-quality car.

Question

Quizplus · Accepted Answer

A bumper-to-bumper warranty on a used car is a costly signal that the car is of high quality. This is because it would be prohibitively expensive to put such a warranty on a low-quality car that is likely to need frequent repairs. Therefore, a bumper-to-bumper warranty is a strong signal of quality that can help to differentiate high-quality cars from low-quality ones in the used car market.

A Bumper-To-Bumper Warranty on a Used Car Is a Signaling