Without more information,consumers do not know the quality of each dealership's cars.In this case,consumers would figure that they have a 50-50 chance of ending up with a high-quality car,and are thus willing to pay $8,500 for a car Harry has an idea:He will offer a bumper-to-bumper warranty for all cars he sells.He knows that a warranty lasting Y years will cost $500Y on average,and he also knows that if Lew tries to offer the same warranty,it will cost Lew $1000Y on average. (a) Suppose Harry offers a one-year warranty on all cars it sells. (1)What is Lew's profit ifit does not offer a one-year warranty?Ifit does offer a one-year warranty? (2)What is Harry's profit if Lew's does not offer a one-year warranty?If it does offer a one-year warranty? (3)Will Lew's match Harry's one-year warranty? (4)Is it a good idea for Harry's to offer a one-year warranty? Without offering the warranty,Lew's is able to make $2,000 per car (7000-5000).If it were to offer the warranty,each car will now cost Lews $6,000,but as consumers will not be able to determine the quality of the cars they will be willing to a car,and Lewwill make500 per car(8500-6000). If Lew's does not offer aone-year warranty then Harry's can buy its cars for $8,000,sell the cars for $10,000,and make a profit of $1,500 per car after the $500 warranty cost.If Lew's does offer a one year warranty then Harry's will only be able to sell its cars for $8,500 and the company will not make any profit. Lew's will match Harry's warranty because if it does then its profit increases to2500 per car. Harry's shoul not ofer the one-year warranty unless it thinks that Lews will act irrationally and not offer the one-year warranty.Given Lew's will match the warranty.Harry's is better off not offering the warranty. What if Harry offers a two-year warranty?Will this generate a credible signal of quality?What about a three-year warranty? If Harry's offers a two-ye each car will cost $9.000.It will earn 1.000De consumers will r the hi qu lity of it Lew's will not offer a two year warranty because if they do they will on earn profit of S1,500 per car.which is less than the $2.000 they would earn without offering the warranty.The two year warranty is a credible signal. With a three-year warranty Harrys would be making $500 per car,the same that it would have made had it not signaled the higher quality of its Without more information, consumers do not know the quality of each dealership’s cars. In this case, consumers would figure that they have a 50-50 chance of ending up with a high-quality car, and are thus willing to pay $8,500 for a car. Harry has an idea: He will offer a bumper-to-bumper warranty for all cars he sells. He knows that a warranty lasting Y years will cost $500Y on average, and he also knows that if Lew tries to offer the same warranty, it will cost Lew $1000Y on average. (a) Suppose Harry offers a one-year warranty on all cars it sells. (1) What is Lew’s profit if it does not offer a one-year warranty? If it does offer a one-year warranty? (2) What is Harry’s profit if Lew’s does not offer a one-year warranty? If it does offer a one-year warranty? (3) Will Lew’s match Harry’s one-year warranty? (4) Is it a good idea for Harry’s to offer a one-year warranty? Without offering the warranty, Lew’s is able to make $2,000 per car (7000-5000). If it were to offer the warranty, each car will now cost Lew’s $6,000, but as consumers will not be able to determine the quality of the cars they will be willing to pay $8,500 for a car, and Lew’s will make $2,500 per car (8500-6000). If Lew’s does not offer a one-year warranty then Harry’s can buy its cars for $8,000, sell the cars for $10,000, and make a profit of $1,500 per car after the $500 warranty cost. If Lew’s does offer a one year warranty then Harry’s will only be able to sell its cars for $8,500 and the company will not make any profit. Lew’s will match Harry’s warranty because if it does then its profit increases from $2,000 to $2,500 per car. Harry’s should not offer the one-year warranty unless it thinks that Lew’s will act irrationally and not offer the one-year warranty. Given Lew’s will match the warranty, Harry’s is better off not offering the warranty. (b) What if Harry offers a two-year warranty? Will this generate a credible signal of quality? What about a three-year warranty? If Harry’s offers a two-year warranty each car will cost $9,000. It will earn $1,000 per car as consumers will recognize the higher quality of its cars. Lew’s will not offer a two year warranty because if they do they will only earn profit of $1,500 per car, which is less than the $2,000 they would earn without offering the warranty. The two year warranty is a credible signal. With a three-year warranty Harry’s would be making $500 per car, the same that it would have made had it not signaled the higher quality of its