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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