Is the policy likely to create a moral hazard problem

Reference no: EM13902720

Faced with a reputation for producing automobiles with poor repair records, a number of American com- panies 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.

Reference no: EM13902720

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