/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q1E Question:Many consumers view a w... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 17: Q1E (page 645)

Question:Many consumers view a well-known brand name as asignal of quality and will pay more for a brand-nameproduct (e.g., Bayer aspirin instead of generic aspirin,or Birds Eye frozen vegetables instead of the supermarket鈥檚own brand). Can a brand name provide auseful signal of quality? Why or why not?

Short Answer

Expert verified

The brand name acts as the signal of quality since it removes the problem of asymmetric information; the producer incurs a huge cost on the advertisement to create a brand name that depicts it as of higher quality.

Step by step solution

01

Brand names as a signal of quality

Brand names are a very good signal of quality. A brand name removes the asymmetry in the information between buyers and sellers. Since a customer is generally unaware of the quality of the various similar but differentiated products in the market, the brand's name helps them develop trust and buy a product whose quality is guaranteed by the company.

The producers usually incur a huge cost for advertisement and marketing, which helps them spread awareness about the brand. Aproducer will never incur a huge sum to sell a bad-quality product. This would not help them in retaining their customers, and it will be an unnecessary cost. Therefore, advertising is mostly done to promote the sale of good quality products.

Thus, a brand name created through advertising signals a good quality.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Gary is a recent college graduate. After six months at his new job, he has finally saved enough to buy his first car.

a. Gary knows very little about the difference between makes and models. How could he use market signals, reputation, or standardization to make comparisons?

b. You are a loan officer in a bank. After selecting a car, Gary comes to you seeking a loan. Because he has only recently graduated, he does not have a long credit history. Nonetheless, the bank has a long history of financing cars for recent college graduates. Is this information useful in Gary鈥檚 case? If so, how?

An insurance company is considering issuing three types of fire insurance policies: (i) complete insurance coverage,(ii) complete coverage above and beyond a $10,000 deductible,

and (iii) 90 percent coverage of all losses. Which policy is more likely to create moral hazard problems?
Faced with a reputation for producing automobiles with poor repair records, a number of American companies have offered extensive guarantees to car purchasers(e.g., a seven-year warranty on all parts and labor associated with mechanical problems).

a. In light of your knowledge of the lemons market, why is this a reasonable policy?

b. Is the policy likely to create a moral hazard problem? Explain.

To promote competition and consumer welfare, the Federal Trade Commission requires firms to advertise truthfully. How does truth in advertising promote competition? Why would a market be less competitive if firms advertised deceptively?

Two used car dealerships compete for side by side on a main road. The first, Harry鈥檚 Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Harry鈥檚 \(8000to buy and service each car that it sells. The second dealership, Lew鈥檚 Motors, always sells lower-quality cars. On average, it costs Lew鈥檚 only \)5000 for each

car that it sells. If consumers knew the quality of the used cars they were buying, they would pay \(10,000on average for Harry鈥檚 cars and only \)7000 on average for Lew鈥檚 cars.

Without more information, consumers do not know the quality of each dealership鈥檚 cars. In this case, they would figure that they have a 50鈥�50 chance of ending up with a high-quality car and are thus willing to pay \(8500 for a car.

Harry has an idea: He will offer a bumper-to-bumper warranty for all cars that he sells. He knows that a warranty lastingYyear will cost \)500Yon average, and he also knows that if Lew tries to offer the same warranty, it will cost Lew $1000Yon average.

a. Suppose Harry offers a one-year warranty on all of the cars he sells.

i. What is Lew鈥檚 profit if he does not offer a one-year warranty? If he does offer a one-year warranty?

ii. What is Harry鈥檚 profit if Lew does not offer a one-year warranty? If he does offer a one-year

warranty?

iii. Will Lew鈥檚 match Harry鈥檚 one-year warranty?

iv. Is it a good idea for Harry to offer a one-year warranty?

b. What if Harry offers a two-year warranty? Will this offer generate a credible signal of quality? What about a three-year warranty?

c. If you were advising Harry, how long a warranty would you urge him to offer? Explain why.
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.