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Cost Analysis of Lemon Law Warranties for Used Equipments

Hennie Husniah, R. Wangsaputra, Bermawi P. Iskandar

Abstract



This paper deals with a warranty policy for a repairable used equipment where it is protected by lemon laws during the warranty period. Under the lemon law warranty considered, a lemon is declared when one of the two conditions occurs: (i) the equipment has been returned to the dealer k (e.g. k=3) times to have the same problem fixed, but the dealer was unable to repair the problem satisfactorily, or (ii) the used equipment has been out of service more than d (e.g. d=30) days due to one or more defects. If the used product turns to be a lemon, then two cases are studied – (i) refund and (ii) replacement cases. For (i), the dealer will refund the purchase price, and replace with a new one with a new warranty for (ii). We give numerical examples to illustrate the expected warranty servicing cost and the risk of the warranty cost exceeding a limit cost for each cases under various different condition and some guidelines for the dealer related to the lemon laws.

Keywords


Lemon laws, warranty, used equipment, refund, replacement, expected warranty cost.

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