Suppose That Two Types of Indistinguishable Coffee Beans Are Imported

question 30

Multiple Choice

Suppose that two types of indistinguishable coffee beans are imported to the U.S.: those grown in the mountains of South America and those grown in greenhouses in Canada.Mountain grown coffee produces a better tasting coffee,but buyers cannot distinguish the beans by sight or smell.Only the importers know the source of the beans.Buyers value mountain grown beans at $10 a pound and greenhouse grown beans at $3 a pound.Assume that 70% of imported beans are mountain grown,and 30% are greenhouse grown.
Suppose that no mountain-grown beans are imported because buyers are worried that they might end up with Canadian beans.Importers are considering two possible approaches to solve this problem: adding a label indicating country of origin to each bag or serving samples to customers prior to purchase.Which approach will solve the lemons problem in the coffee market?

• A)Either approach will solve the problem equally effectively.
• B)The tasting approach will be more effective because it is costly-to-fake.
• C)The label will be more effective because it is credible.
• D)Importers will need to use both approaches because neither alone will solve it.

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Definitions:

Customer's Inconvenience

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Granting Claims

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