service contract the buyer pays an extra amount and the seller agrees to fix anything specified in the contract

that goes wrong for a set time period

warranty a promise to fix or replace the good for a certain period of time

Key Concepts and Summary

16.1 The Problem of Imperfect Information and Asymmetric Information

Many make economic transactions in a situation of imperfect information, where either the buyer, the seller, or

both are less than 100% certain about the qualities of what they are buying or selling. When information about

the quality of products is highly imperfect, it may be difficult for a market to exist.

A “lemon” is a product that turns out, after the purchase, to have low quality. When the seller has more

accurate information about the product's quality than the buyer, the buyer will be hesitant to buy, out of fear of

purchasing a “lemon.”

Markets have many ways to deal with imperfect information. In goods markets, buyers facing imperfect
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