Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when

Question

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A warranty on a lemon (a poor-quality car) is costly to the seller because it is likely that the car will need repairs, which the seller will have to pay for under the warranty. This makes offering a warranty a credible signal of high quality; if the seller is willing to offer a warranty, it suggests they believe in the car's quality and are not expecting it to need costly repairs.

Used Car Buyers Will Believe That a Car Is of Good