EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 8, Problem 8DQ
To determine
The status – quo bias in insurance policies:
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In Hayward, there are 100 people who want to sell their used cars. The problem is that nobody
except the original owners know which are which. Owners of lemons will be happy to get rid of
their cars for any price greater than $200. Owners of peaches will be willing to sell them for any
price greater than $1,500 but will keep them if they can't get $1,500. There are a large number of
buyers who would be willing to pay $2,500 for a peach but would pay only $300 for a lemon.
When these buyers are not sure of the quality of the car they buy, they are willing to pay the
expected value of the car, given the knowledge they have.
What is the minimum probability for a used car to be a peach such that peaches stay in the market?
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O
0.33
0.67
0.55
0.5
Suppose John buys a tiger because he wants to be like the cool king guy from The Walking Dead. John can take care to prevent his tiger from eating his neighbors by building a fence. The fence costs less than the expected harm to John’s neighbors that building the fence will prevent. Suppose that John’s neighbors also can take precautions, like wearing tiger-proof armor or carrying large caliber rifles with them at all times. Assume that the cost of these precautions is less than the expected harm from tiger maulings they will prevent, even if John were to build the fence. Given these circumstances, which is likely to be the most efficient rule?
Question 41 options:
a)
No liability
b)
Negligence
c)
Strict liability
d)
Strict liability and negligence provide equivalent incentives
e)
None of the above
Half of the used cars for sale in a market are good and the other half are lemons.
Owners of good cars are willing to sell them for $1,200, while owners of lemons
are willing to sell them for $50. There are many potential buyers who are willing to
pay $1,500 for a good car and $300 for a lemon. Buyers cannot tell good cars from
lemons, but the original owners know whether a car is a lemon or not.
There will be an equilibrium in which all used cars sell for $1,150.
There will be an equilibrium in which lemons sell for $50 and good used cars sell for
$1,200.
There will be an equilibrium in which all used cars sell for $800.
The only equilibrium is one in which only lemons are sold.
There will be an equilibrium in which lemons sell for $300 and good used cars sell for
$1,500.
Chapter 8 Solutions
EP ECONOMICS,AP EDITION-CONNECT ACCESS
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- Suppose John buys a tiger because he wants to be like the cool king guy from The Walking Dead. John can take care to prevent his tiger from eating his neighbors by building a fence. The fence costs less than the expected harm to John’s neighbors that building the fence will prevent. Suppose that John’s neighbors also can take precautions, like wearing tiger-proof armor or carrying large caliber rifles with them at all times. Assume that the cost of these precautions is less than the expected harm from tiger maulings they will prevent, even if John were to build the fence. Given these circumstances, which is likely to be the most efficient rule? A. No liability B. Negligence C. Strict liability D. Strict liability and negligence provide equivalent incentives E. None of the abovearrow_forward6. Answer which happens, moral hazard or adverse selection, or nothing happens under each of the following situations. [M20]: A driver drives a car rough because s/he has a property insurance of a car. b. Adverse selection [M21]: Since a driver cannot distinguish among qualities of cars, s/he may buy a bad one. a. Moral hazard c. nothing a. Moral hazard b. Adverse selection c. nothing [M22]: Banks look for lenders, but most customers who apply for loans seem to have difficulty repaying them even in assuming they make an identical effort. a. Moral hazard b. Adverse selection c. nothingarrow_forwardConsider the model of the market for lemons from Chapter 22. Suppose that there are two types of used cars — good ones and lemons — and that sellers know which type of car they have. Buyers do not know which type of car a seller has. The fraction of used cars of each type is 21 and buyers know this. Let’s suppose that a seller who has a good car values it at $10,000 and a seller with a lemon values the lemon at $5,000. A seller is willing to sell his car for any price greater than or equal to his value for the car; the seller is not willing to sell the car at a price below the value of the car. Buyers’ values for good cars and lemons are $14,000 and $8,000, respectively. As in Chapter 22 we will assume that buyers are risk-neutral; that is, they are willing to pay their expected value of a car. (a) Is there an equilibrium in the used-car market in which all types of cars are sold? Briefly explain.(b) Is there an equilibrium in the used-car market in which only lemons are sold? Briefly…arrow_forward
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