For an action to be an effective signal:
A)it must be costly, and less costly to the person with the higher-quality product
B)it must be costly, and less beneficial to the person with the higher-quality product
C)it cannot be costly
D)none of the above

Question

Quizplus · Accepted Answer

An effective signal must be costly to the person sending the signal, as it signals that they are willing to incur a loss to prove their quality. It is also less costly to the person with the higher-quality product, as they are more likely to be able to afford the cost of the signal. Therefore, option A is the best choice. Option B is incorrect because the signal must be less costly to the higher-quality person, not less beneficial. Option C is incorrect because a signal that is not costly is not effective in proving quality.

For an Action to Be an Effective Signal