Bundle: Managerial Economics: Applications, Strategies And Tactics, 14th + Mindtap Economics, 1 Term (6 Months) Printed Access Card
14th Edition
ISBN: 9781337198196
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Chapter 15, Problem 3E
To determine
To ascertain:The specific consequences of loan terms that worsen the problem of moral hazard.
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- One method of solving this problem is through signaling. Signaling is a strategy one uses when they have information. The goal is to use a signal to convince the buyer that the good or service that is being sold is quality and will meet the buyer's wants. Offer an example of a company that uses a signal to help sell its product. What is the signal? What information is the signal trying to convey? Do you think the signal is effective? Why or why not? Does this signal improve market efficiency? Why or why not?arrow_forwardJohn wants to buy a used car. He knows that there are two types of car in the market, plums and lemons. Lemons are worse quality cars and are more likely to break down than plums. John is willing to pay £10, 000 for a plum and £2, 000 for a lemon. Unfortunately, however, he cannot distinguish between the two types. Sellers can offer a warranty that would cover the full cost of any repair needed by the car for y ∗ years. Considering the type and likelihood of problems their cars can have, owners of plums estimate that y years of guarantee would cost them 1000y, owners of lemons estimate that the cost would be 2000y. John knows these estimates and decides to offer £10, 000 if a car comes with y ∗ years of warranty, £2, 000 if a car comes without warranty. For which values of y ∗ is there a separating equilibrium where only owners of plums are willing to offer the y ∗ -years warranty? Clearly explain your reasoning.arrow_forwardSuppose that Alex wants to purchase a boat from Rosette. Alex is willing to pay up to $18,000, while Rosette is not willing to accept any offer below $15,000. Assume that there are a finite number of negotiating rounds. 1.If the discount factors for Rosette and Alex are δR = 0.05 and δA = 0.05, respectively, how much should Alex offer for the boat? 2.Suppose that Rosette’s discount factor is δR = 0.20, and Alex’s discount factor is δA =0.15. 3.How much should Alex offer for the boat? How does this offer differ from your r to part a, and why?arrow_forward
- Suppose you have one type of customer who comes to see your team play and that customer has a demand curve of P = $40 - Q. Also assume the marginal cost of having a person come to see your game is a constant $2. If you were to charge a two-part pricing scheme whereby you charged a PSL and then a price-per-ticket, which strategy would lead to the highest possible profit per customer? PSL = $722; P = $2 %3D PSL = $361; P = $21 %3D PSL = $1,444; P = $21 %3D PSL = $361; P = $2 %3Darrow_forwardTwo parties, Juan and Ben, have been negotiating the purchase by Ben of Juan's car. Juan receives a new and higher bid for his car from Adriana. How might Adriana's bid change Juan and Ben's threat values? The threat values are unchanged. Juan now values the car at the price of Adriana's bid, her bid is his opportunity cost of selling the car to Ben, and that opportunity cost is Juan's new threat value. Juan's new threat value is the product of the difference between Ben and Adriana's offers and the probability the car will be sold to Adriana. Juan's threat value is unchanged, but Ben has to consider his new opportunity costarrow_forwardConsider the following scenarios in the Ultimatum game, viewed from the perspective of the Recipient. Assume that the Recipient is motivated by negative reciprocity and will gain $15 of value from rejecting an offer that is strictly less than 50 percent of the total amount to be divided between the two players by the Proposer. Assume that the Proposer can only make offers in increments of $1. If the pot is $30, what is the minimum offer that the Responder will accept? What percent of the pie is this amount? The minimum offer that will be accepted is S. which represents percent of the pie. If the pot is $100, what is the minimum offer that the Responder will accept? What percent of the pie is this amount? The minimum offer that will be accepted is S, which represents percent of the pie. (Round answers to 2 decimal places as needed)arrow_forward
- give an example of an existing economic interaction that exhibits moral hazard. describe the setting and talk about efficiency considerations.arrow_forwardThe VHS rental market, lead primarily by Blockbuster for decades, has largely been decimated by streaming services like Netflix. The demise of the rental market is due in large measure to moral hazard opportunism adverse selection (WRONG) creating destructionarrow_forward"Information asymmetry is detrimental for decision-making in the marketplace and hence is a market failure." Provide an example to illustrate this. Then suggest a policy that is used to address this problem.arrow_forward
- THE PRISONERS' DILEMMA Consider the following simple model of a cocktail party. Alice and Bob are carrying on separate conversations at the party. Alice speaks at volume a and Bob speaks at volume b. The communication benefit to Alice is al(a + b) and the benefit to Bob is b/(a + b). The vocal-strain cost to Alice is ca and the cost to Bob is cb, where c is a parameter. Suppose that the players have two choices: speaking softly at volume 1, or speaking loudly at volume 4. This leads to the following game in strategic form, with Alice choosing the row and Bob choosing the column. a = 1 a = 4 b = 1 0.5-c, 0.5-c 0.8-4c, 0.2-c 0.0400 0.0500 0.0750 0.0800 0.1500 b = 4 0.2 c, 0.8-4c - 0.54c, 0.5-4c For which of the following values of c is this game a prisoners' dilemma? (Mark all values for which this is true.)arrow_forwardHow does the problem of moral hazard affect the safety of sports such as football and boxing when safety regulations started requiring that players wear more padding?arrow_forwardEco Tour operates a hiking trip in a forest, resulting in destruction of the trees in the forest. This reduces the income of Woody who rely on chopping trees in the forest and sell firewood for a living. The trees will be able to recover if Eco Tour were to reduce the number of hiking trips. Assume there is no negotiation cost between Woody and Eco Tour. The payoff to both parties with current and reduced operations of Eco Tour is shown in the table below: Income Eco Tour Woody SINGAPORE UNIVERSITY OF SOCIAL SCIENCES Eco Tour maintain current operations $3,000 $1,200 Eco Tour reduces operations $1,600 $2,800 (a) Explain how the social optimal outcome can be achieved if Woody has the right to a damaged-free forest. (b) How will your answer be affected if Eco Tour has the right to organize hiking trips and not liable for any damages to the forest?arrow_forward
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