EBK MICROECONOMICS
21st Edition
ISBN: 8220103960151
Author: McConnell
Publisher: YUZU
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Question
Chapter 8, Problem 8DQ
To determine
The status – quo bias in insurance policies:
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Students have asked these similar questions
In Hayward, there are 100 people who want to sell their used cars. Everybody knows that 50 of
these cars are "lemons" and 50 of these cars are "peaches." 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.
If all 100 used cars in Hayward were for sale, how much would buyers be willing to pay for a used
car? Type the number without the thousands separator or $ sign.
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 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.
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