Some sellers offer to buy back a good later at some prespecified price. Why woul

Question

Some sellers offer to buy back a good later at some prespecified price. Why would a firm make such a commitment? O A. The firm is trying to prevent a secondary market for its used goods from developing, which would erode sales of its products. O B. If the firm faces heavy competition, this strategy may be a way for the firm to maintain a high price for its product. ° C. The firm is in effect guaranteeing the product will hold a certain value, and thus is trying to eliminate a moral hazard problem to increase the demand for its product. O D. The firm is in effect guaranteeing the product will hold a certain value, and thus is trying to eliminate asymmetric information to increase the demand for its product.

Explanation / Answer

C. The firm is guaranteeing....

Reason

Here the moral hazard arises consumers are not as well informed as the sellers about the quality of the products, thus they need to eliminate that problem of this asymmetry by giving such guarantee to replace with a price.

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