Problems: Chapters $17,19,$ and $20$

In the late $1990$ s$,$ 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 $1999,$ manufacturers lost an average of $$480$ on each returned car $($the auction price was, on average, $$480$ less than the residual value$).$

Suppose two customers have leased cars from a manufacturer. Their lease agreements are up$,$ and they are considering whether to keep $($and purchase at $60\%$ of the new car price$)$ their cars or return their cars. Two years ago, Hubert leased a car that was valued new at $$17,000.$ If he returns the car, the manufacturer could likely get $$8,670$ at auction for the car. Eric also leased a car, valued new at $$17,000,$ two years ago. If he returns the car, the manufacturer could likely get $$11,900$ at auction for the car.

Use the following table to indicate whether each buyer is more likely to purchase or return the car.

$\backslash$table$[[$Buyer$,$Keep and Purchase Car,Return Car$],[$Eric$,,],[$Hubert$,,]]$

The manufacturer will lose money $($at auction, relative to the residual value of the car$)$ if $$ returns the car instead of keeping and purchasing it$.$

True or False: Setting a more accurate residual price of each car would help attenuate the problems of adverse selection.

$$ True

$$ False