Home » ` Purchase with a full replacement warrant! 120 – p -IT – purchase with a partial warranty OF – } Purchase without any warrant!

# ` Purchase with a full replacement warrant! 120 – p -IT – purchase with a partial warranty OF – } Purchase without any warrant!

Consider a Honda Accord whose value to a consumer is V if the car works and 0 if the car is defective,

where V > 0. Suppose that it is commonly known that Honda Accords have a probability of being

functional, where 0 < probability < 1. Honda has 3 options: (1) sell Accords with a full replacement warranty

(i.e., keep replacing until a functional car is delivered), (2) sell Accords with a one-time replacement

warranty, or (3) sell Accords without a warranty. Let p be the price and c > 0 denote the unit

production cost of each Accord. Assume that Honda is the only car manufacturer in the world (i.e.,

they are a monopoly). The utility to the consumer is

(a) What is the profit function of Honda if no warranty is offered?

(b) What is the profit function of Honda if a partial warranty is offered?

(c) What is the profit function of Honda if a full replacement warranty is offered?

V – !`Purchase with a full replacement warrant!”120 – p -IT – ” purchase with a partial warrantyOF – }Purchase without any warrant!”does not purchase

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