Question

For a signal to convey credible information about the quality of a good, the signal must:...

For a signal to convey credible information about the quality of a good, the signal must:

A. not be costly to send.

B.be equally costly to send, regardless of the good's quality.

C. be less costly to send if the good is low quality than high quality.

D. be less costly to send if the good is high quality than low quality.

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Answer #1

Signalling is an idea used in a market where there is Asymmetric Information. It is used to convey credible idea from one party to another. To convey signal credibly, signal should be costly or difficult to fake. Eg. two producers are selling TVs of different quality. The producer selling good quality TV can give signal to its customers by offering Guarantee/ Warrante of longer duration which the other producer will find difficult to do because his product is not of such high quality.

So, the Answer is - (D) be less costly to send if the good is high quality than low quality.

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