Advanced Micro · intermediate
What moves on the Adverse Selection (Lemons Problem) diagram
Warranties act as a credible signal: costly for lemon owners, cheap for good-car owners. Both sides' curves move toward more high-quality trade.
A warranty is cheap to offer on a good car and expensive on a lemon.
The law makes warranties mandatory.
Buyers pay more (protection raises willingness to pay), and good-car owners can accept a bit less since the warranty certifies their car.
Both moves raise the share of good cars traded. Warranties work by making honesty cheaper than lying.
Examiners ask this as: warranty, mandatory guarantee, lemon laws, consumer protection, money back guarantee.
Other scenarios on Adverse Selection (Lemons Problem)