Which of the following must be true about a signal that is used to reveal private information in order for the signal to be effective ?
Correct answer: C. It must be costly to the signaling party but less costly to the party with higher-quality product
- A. It must be "as seen on TV"
- B. It must be free to the signaling party
- C. It must be costly to the signaling party but less costly to the party with higher-quality product
- D. It must be applied to an inexpensive product
Explanation
A signal works when it is relatively more costly for low-quality sellers than for high-quality sellers, allowing buyers to distinguish quality. Thus, the cost must be borne by the signaling party and be lower for the higher-quality product.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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