2.(a) Consider the market for used cars as presented in class and in the course notes....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
2.(a) Consider the market for used cars as presented in class and in the course notes. Let X = value of the car. Sellers know the value of the car they sell and their utility is U(X) = X. Buyers only know that car values are uniformly distributed on ($4000, $6000), are risk-neutral, and their utility is 1.1XX. Suppose the posted price for used cars is $5,000. Will consumers buy a car at this price? Explain. (b) Suppose all individuals face a loss distribution that is uniformly distributed on ($0, $15,000). Each individual knows his loss but the insurance company does not. If all individuals are risk neutral will the insurance company make a profit if it sells a complete-cover insurance policy for $10,000 (and faces administration costs of $1,000 per policy)? Explain your answer. (c) Give a definition of adverse selection. 2.(a) Consider the market for used cars as presented in class and in the course notes. Let X = value of the car. Sellers know the value of the car they sell and their utility is U(X) = X. Buyers only know that car values are uniformly distributed on ($4000, $6000), are risk-neutral, and their utility is 1.1XX. Suppose the posted price for used cars is $5,000. Will consumers buy a car at this price? Explain. (b) Suppose all individuals face a loss distribution that is uniformly distributed on ($0, $15,000). Each individual knows his loss but the insurance company does not. If all individuals are risk neutral will the insurance company make a profit if it sells a complete-cover insurance policy for $10,000 (and faces administration costs of $1,000 per policy)? Explain your answer. (c) Give a definition of adverse selection.
Expert Answer:
Answer rating: 100% (QA)
a Used Car Market Consumers will not buy a car at the posted price of 5000 Heres why Sellers They know their cars value X and want to get the full val... View the full answer
Related Book For
Microeconomics
ISBN: 9781464146978
1st Edition
Authors: Austan Goolsbee, Steven Levitt, Chad Syverson
Posted Date:
Students also viewed these economics questions
-
Consider the market for used cars shown in the figure below. The top panel (a) shows the market for low-quality cars (lemons); the bottom panel (b) shows the market for high-quality cars (plums). If...
-
Wright Aircraft, Inc. Wright Aircraft is the global leading builder of long-haul jet aircraft for civilian aviation. Management expects the company to maintain its leadership for the foreseeable...
-
Consider the example in Exhibit 5.5. Can you think of anything else you might do with that example that would be helpful to the ultimate decisionmaker? exhibit 5.5 Decision Tree Analysis Using Net...
-
You pull upward on a stuffed suitcase with a force of 105 N, and it accelerates upward at 0.725 m/s2. What are (a) The mass (b) The weight of the suitcase?
-
Convert the circuits in Fig. 2.112 from Y to ?
-
Describe the role of the judge and jury in the trial process.
-
The Manana Corporation had sales of $60 million this year. Its accounts receivable balance averaged $2 million. How long, on average, does it take the firm to collect on its sales?
-
Smitty had a duty of select answerto HaileyThis duty required Smitty to act as select answer would act. A reasonable accountant select answer familiar with tax rules and regulations when asked to...
-
The Vintage Restaurant is located on Captiva Island, a resort community near Fort Myers, Florida. The restaurant, which is owned and operated by Karen Payne, just completed its third year of...
-
Draw the front view as an offset section, left side view as a full-section and top view with dimensions. All fillets and rounds are R3 unless otherwise specified. ROUNDS AND FILLETS R3 MATL MALLEABLE...
-
A small trains station as a ticket booth with 1 agent. Requests for tickets and information are 12 per hour, and follow a Poisson distribution. The service time is assumed to follow an exponential...
-
Duffer McGee stood on a hill and used a nine iron to hit a golf ball that reached a maximum height of 136 feet and stayed in the air for 5.5 seconds before it touched the ground. Pretty good for a...
-
For the polynomial function find the following: (i) Degree of the polynomial; (ii) All x intercepts; (iii) The y intercept. y = x + 6x - 40
-
ACME consultants have presented the following costs for their client's business transformation project: Activity Cost (USD) Appoint marketing experts 10,000 Prepare enhanced product and service...
-
It is believed that a certain drug can reduce a patient's pulse rate. In an experiment it was found that the larger the dose of the drug, the more the pulse rate reduced. A doctor wishes to find a...
-
PQR Co., has identified the following two mutually exclusive projects. Both have a required rate of return of 13 percent. Year Cash Flow for A in $ Cash Flow for B in $ 0 -136933 -328014 1 54402...
-
a. What is the cost of borrowing if Amarjit borrows $28 500 and repays it over a four-year period? b. How many shares of each stock would he get if he used the $28 500 and invested equally in all...
-
Bob, Carol, and Ted are residents of a tiny commune in darkest Peru. Bob currently has a utility level (Ub) of 55 utils, Carol's utility (Uc) is 35 utils, and Ted's utility (Ut) is 10 utils. Alice,...
-
In the 1960s, tobacco producers engaged in fierce battles for market share. The major weapon in that war was advertising - advertising that was designed not to attract new smokers, but to lure...
-
Peanut butter has always been thought to be a delicious, wholesome food. That is, until the FDA releases its Food Defect Guidelines that set maximum allowable amounts of rodent excreta that may be...
-
The following are summaries of the cash book and bank accounts of J. Duncan who does not keep his books using the double entry system. You are required to: (a) Calculate the value of J. Duncan's...
-
Read the following and answer the questions below. On 31 December 2015 the bank column of C. Tench's cash book showed a debit balance of 1,500. The monthly bank statement written up to 31 December...
-
The bank columns in the cash book for June 2016 and the bank statement for that month for D. Hogan are as follows: You are required to: () Write the cash book up to date to take the above into...
Study smarter with the SolutionInn App