Question

In the late 1990s, car leasing was very popular in the United States.  A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car.  If the customer decided to keep the car, the customer would pay a price to the manufacturer, the “residual value,” computed as 60% of the new car price.  The manufacturer would then sell the returned cars at auction.  In 1999, the manufacturer lost an average of $480 on each returned car (the auction price was, on average, $480 less than the residual value).

  • Why was the manufacturer losing money on this program?
  • What should the manufacturer do to stop losing money (while still leasing cars)?
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Managerial Economics: A Problem Solving Approach
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ISBN: 9781337106665
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Publisher: Cengage Learning
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