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ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Which of the following is an example of the principal-agent problem at work?
Cynthia pursues a less healthy lifestyle because of the excellent health insurance provided by her employer
Sam gets a diagnosis that will require expensive medical treatment but hides this information from the agent in order to obtain less expensive insurance
Anthony drives a little more dangerously because the vehicle has an anti-crash system that will help prevent accidents
A couple hires a babysitter to watch their child while they're away. The babysitter fails to properly supervise. Instead, he or she watches television in a separate room.
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- 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.arrow_forwardWhcih of the following could help overcome the problem of adverse selection in the used car market? Multiple Choice The buyer could have a mechanic inspect the car before buying it. The government could enact disclosure laws requiring that potential buyers be told all material facts about the condition of a vehicle for sale. The seller could include a warranty. all of the abovearrow_forwardInsurance companies are regulated under federal insurance laws. True Falsearrow_forward
- John 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_forwardAccording to the strict liability theory, Question 4 options: Manufacturers can be held liable only if they are negligent in some way If a consumer signs a sales warranty, the manufacturer cannot be held liable A contractual relation is necessary for the manufacturer to be held liable If a product is defective and injures a consumer, a manufacturer can be held liable all of the abovearrow_forwardCan the principal agent problem be avoidedarrow_forward
- Alana wishes to obtain auto insurance. She wants 100/300/100 liability coverage, $250 deductible collision and full coverage comprehensive. She lives in territory 2 and has been assigned to driver class 2 with a rating factor of 1.25. Based on Table 19-6 and Table 19-7, what would be her total premium, if her three-year-old car were in model class L? (Round your answer to the nearest cent.) a. $355.00 b. $365.00 c. $456.25 d. $465.38arrow_forwardWhich of the following would help an insurance company to overcome the adverse selection problem? Ability to sort individuals into risk groups and charge different premiums A government requirement that people buy insurance Both of thesearrow_forwardEach stock listed on the New York Stock Exchange is allocated to a specialist, who is responsible for maintaining an orderly market. This person has a specific location on the floor of the exchange known asarrow_forward
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