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Individual Problems 20-1 Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you...

1. Individual Problems 20-1


Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Suppose that you have currently set the price of the extended warranty at 2% of the product price.

An analyst at your company argues that the types of customers who purchase the extended warranty are more likely to misuse and break the product. However, the analyst argues, the company cannot accurately identify these types of customers.


The analyst is claiming that  CHOOSE ONE: ADVERSE SELECTION OR MORAL HAZARD  will cause the claim rate to be CHOOSE ONE: LOWER OR HIGHER     than 2%



True or False: You should set the price of the extended warranty at less than 2% of the product price.
True
False

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