In equilibrium, consumers will incur costs to signal their type (in markets with adverse selection) only if this results in a price that is lower than the pooling equilibrium price.

Question

Quizplus · Accepted Answer

In adverse selection markets, consumers incur costs to signal their type in order to separate themselves from the low-quality pool. This separation can lead to a higher price in equilibrium, as consumers who are willing to incur the cost of signaling their quality will be charged a higher price than those who do not. Therefore, the correct statement is that in equilibrium, consumers will incur costs to signal their type only if this results in a price that is higher than the pooling equilibrium price.

In Equilibrium, Consumers Will Incur Costs to Signal Their Type