Which of the following are potential problems faced by a firm that wants to provide warranties for its lawnmowers? (Select all that apply.)
A)A moral hazard problem might arise,in that homeowners may be less careful with the mower,since they can always return it if it breaks.
B)The warranty may select for homeowners that don't have a lot of mowing to do,or have smooth lawns,because they won't have to pay as much for a warranty.
C)The warranty will increase demand by assuring customers of the product's quality.
D)The warranty will reduce demand because only makers of low-quality goods would need to reassure consumers in this way.

Question

Quizplus · Accepted Answer

A moral hazard problem can occur when a warranty is provided because it reduces the incentive for homeowners to take care of the mower, knowing that they can return it if it breaks. This can lead to increased costs for the firm due to more frequent repairs or replacements.

Which of the Following Are Potential Problems Faced by a Firm