# Intuitively why can a warranty signal high quality?

Q2. A firm knows the quality of its production process but the buyer does not. If the firm is of hi Show more Q2. A firm knows the quality of its production process but the buyer does not. If the firm is of high quality its product is faulty with probability p1. If the firm is of low quality its product is faulty with probability p2 where p2 > p1. The value of the product to the buyer is one if it is not faulty and zero if it is faulty. The buyer pays the expected value of the product to him. The firm chooses whether or not to offer a warranty which replaces a faulty product with a perfect one at cost c to the seller. (Hence the product is always worth one to the buyer when accompanied with a warranty.) The buyer then updates his belief regarding the quality of the product (based on whether a warranty is offered) and chooses whether or not to purchase the product at his expected value. The firms expected payoff is the purchase price minus the expected replacement cost if a warranty is offered. So for example if a high-quality firm offers a warranty its payoff is 1p1c. a. Show that if 1 c p2 there exists a separating equilibrium in which a high-quality p1 firm offers a warranty and a low-quality firm does not offer a warranty. (4 marks) b. Intuitively why can a warranty signal high quality? Briefly interpret the condition in part (a). (2 marks) c. Show that if c 1 there exists a pooling equilibrium in which both high and low quality firms offer a warranty. (4 marks) plz show me how to do it. thanks !!! Show less