Reference no: EM133278023

1. In the early days of internet commerce, many consumers were weary of buying cameras from online retailers because if the camera didn't work or broke shortly after arrival, there was no retail store to return it to. To allay their fears, online retailers offered warranties - if the camera didn't work, it could be returned for a full refund with free return shipping and no questions asked.

Now that consumers are more comfortable with online shopping, retailers have abandoned these warranties. Assume that this market is perfectly competitive, that consumers are risk averse, and that sellers are risk neutral. How will the removal of warranties affect the price and quantity in this market?

(You can also assume that the rate of breakage is independent of if a warranty is offered or not.)

a. Price will increase, Quantity will increase

b. Price will increase, Quantity will decrease

c. Price will decrease, Quantity will increase

d. Price will decrease, Quantity will decrease

e. None of the above

2. Consider a perfectly competitive market in which a binding price ceiling is put in place. In what situation would it be most likely that this price ceiling would hurt consumers overall?

a. Demand is extremely elastic, at the free-market equilibrium price.

b. Supply is extremely elastic, at the free-market equilibrium price.

c. Consumers will always be hurt, overall, by a binding price ceiling.

d. Consumers will never be hurt, overall, by a binding price ceiling.

e. Is "binding price ceiling" some sort of new weird pickup line?