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Cost Analysis of Lemon Law Warranties for Used Equipments

Hennie Husniah, R. Wangsaputra, Bermawi P. Iskandar


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.


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

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