consider the case of asymmetric information discussed in sec

consider the case of asymmetric information discussed in section 3.5, in which a seller may know that her product is high in quality but a buyer may not know it. describe two different steps the seller might take to avoid the adverse selection problem, which otherwise could put her out of business.

Solution

When a seller knows that her product is of good quality she may avoid the adverse selection by taking the following steps.

1. Providing manufacturing warranty to the buyer.

2. Building good reputation with the buyers.

Both these steps will give a signalling effect to the buyers that the product offered by sellers is of high quality. This will also ensure that the seller gets a fair price for his product.