Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 15, Problem 3E
To determine
To ascertain:The specific consequences of loan terms that worsen the problem of moral hazard.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Explain the relationship between moral hazard and insurance premiums
Economics
CHOOSE THE CORRECT ANSWER.
Remember that in the equilibrium prediction of an
ultimatum game, the Proposer will offer the
smallest non-zero amount of money possible.
First-year Commerce students were asked to play an Ultimatum game where a choice had to be made over the division of R100. Offers could only be
made in R10 increments, and the results of the various offers made are reported in the table below.
Amount offered by Proposer
RO
R10
R20
R30
R40
R50
Proportion rejected
100%
60%
50%
30%
10%
0%
What is the equilibrium split of the R100 between the Proposer and the Responder?
O A. Proposer: R50, Responder: R50
O B. Proposer: R10, Responder: R90
O C. Proposer: R90, Responder: R10
O D. Proposer: R60, Responder: R40
O E. Proposer: R40, Responder: R60
One method of solving this problem is through signaling. Signaling is a strategy one uses when they have information. The goal is to use a signal to convince the buyer that the good or service that is being sold is quality and will meet the buyer's wants.
Offer an example of a company that uses a signal to help sell its product. What is the signal?
What information is the signal trying to convey?
Do you think the signal is effective? Why or why not?
Does this signal improve market efficiency? Why or why not?
Chapter 15 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- Suppose that Alex wants to purchase a boat from Rosette. Alex is willing to pay up to $18,000, while Rosette is not willing to accept any offer below $15,000. Assume that there are a finite number of negotiating rounds. 1.If the discount factors for Rosette and Alex are δR = 0.05 and δA = 0.05, respectively, how much should Alex offer for the boat? 2.Suppose that Rosette’s discount factor is δR = 0.20, and Alex’s discount factor is δA =0.15. 3.How much should Alex offer for the boat? How does this offer differ from your r to part a, and why?arrow_forwardJohn 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_forwardThree roommates, Jim, Saleem, and Ritesh, are thinking about buying a new speaker system for their apartment. The speaker system would be a public good if they buy them, and the total cost would be $300 which would be shared equally among the three. Jim values it at $80, Saleem values it at $140, and Ritesh values it at $70. If the speakers are purchased each person gets a payoff equal to their net valuation (valuation minus cost share); if they are not purchased each gets zero payoff. a)Is it socially efficient that they buy the speaker system? With reference to the definition of a public good, why or why not? The roommates decide that they will write down their net valuations, and if these reports sum to more than zero, they will buy the TV (sharing the cost equally), or else they will not. b) If all were to report their true valuations, what payoff would each agent earn? c) Show that if Jim and Ritesh submit their true net valuation, then Saleem does better by submitting a false…arrow_forward
- Two parties, Juan and Ben, have been negotiating the purchase by Ben of Juan's car. Juan receives a new and higher bid for his car from Adriana. How might Adriana's bid change Juan and Ben's threat values? The threat values are unchanged. Juan now values the car at the price of Adriana's bid, her bid is his opportunity cost of selling the car to Ben, and that opportunity cost is Juan's new threat value. Juan's new threat value is the product of the difference between Ben and Adriana's offers and the probability the car will be sold to Adriana. Juan's threat value is unchanged, but Ben has to consider his new opportunity costarrow_forwardFly by night over Uttar Pradesh in northern India, the country’s most populous state, and its cities appear as dazzling islands. In between, however, lies an inky sea. Perhaps two-thirds of Uttar Pradesh’s 200 million people have no regular electricity. In India, 700 million, or more than half of the population, suffer unreliable connections to the national grid, or none. Often, once the sun drops, darkness prevails. On paper, plans exist for linking the country’s northern and southern grids. That would help, yet nobody expects rural India to be properly plugged in for a long time yet. Meanwhile, the villagers soldier on with paraffin lamps, which harm lungs and emit a dim light that is of little use for school homework. Also, darkness breeds danger, so women stay home after the sun goes down. A lack of electricity limits business, as markets and shops close early. Banks have been ordered to reach villages and provide basic financial services, but they need electricity to do so. And…arrow_forward"Information asymmetry is detrimental for decision-making in the marketplace and hence is a market failure." Provide an example to illustrate this. Then suggest a policy that is used to address this problem.arrow_forward
- Eco Tour operates a hiking trip in a forest, resulting in destruction of the trees in the forest. This reduces the income of Woody who rely on chopping trees in the forest and sell firewood for a living. The trees will be able to recover if Eco Tour were to reduce the number of hiking trips. Assume there is no negotiation cost between Woody and Eco Tour. The payoff to both parties with current and reduced operations of Eco Tour is shown in the table below: Income Eco Tour Woody SINGAPORE UNIVERSITY OF SOCIAL SCIENCES Eco Tour maintain current operations $3,000 $1,200 Eco Tour reduces operations $1,600 $2,800 (a) Explain how the social optimal outcome can be achieved if Woody has the right to a damaged-free forest. (b) How will your answer be affected if Eco Tour has the right to organize hiking trips and not liable for any damages to the forest?arrow_forwardIn 2018, Spotify was available in many countries around the world. The same year, Spotify offered an attractive deal available only to students-Spotify Premium, Hulu Limited, and Showtime, all for one monthly payment of $4.99. The fee is half the amount charged for a standard Spotify Premium account. To qualify for the deal, students must provide their information, such as name and birthdate, to Spotify and its third-party partner, SheerID. SheerID is a verification service utilized by companies to confirm various personal attributes and qualifications. In this case, your current student status at a Title IX school is in a database, which is accessed by SheerID. a. In making this offer to students, Spotify is engaging in group pricing, where the market segments are students and nonstudents. using the hurdle method, getting people to self-identify their willingness to pay by requiring them to overcome one or more obstacles. engaging in perfect price discrimination, charging each…arrow_forwardIn 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? Ő O 0.33 0.67 0.55 0.5arrow_forward
- Can you change the payoffs in the table to the right so that the firms choose to invest in safety? Each firm must consider how safe to make its plant. Extra safety is costly. Safety investments-sprinkler systems, color-coded switches. fire extinguishers-by one firm provide an externality to other firms: That firm's lower incidence of accidents reduces the wage that all firms in the industry must pay. Because each firm bears the full cost of its safety investments but derives only some of the benefits, the firms underinvest in safety. It will be a Nash equilibrium for both firms invest safety if O A. the payoffs for both firms investing increase to $750 and the payoffs for both firms not investing decrease to $50. O B. the payoffs for both firms investing go to $0. OC. the payoffs for both firms investing increase to $750. O D. the payoffs for both firms investing increase to $350 and the payoffs for both firms not investing decrease to $50. O E. the payoffs for both firms not investing…arrow_forwardCan you change the payoffs in the table to the right so that the firms choose to invest in safety? Each firm must consider how safe to make its plant. Extra safety is costly. Safety investments-sprinkler systems, color-coded switches, fire extinguishers-by one firm provide an externality to other firms: That firm's lower incidence of accidents reduces the wage that all firms in the industry must pay. Because each firm bears the full cost of its safety investments but derives only some of the benefits, the firms underinvest in safety. It will be a Nash equilibrium for both firms to invest in safety if O A. the payoffs for both firms investing increase to $750 and the payoffs for both firms not investing decrease to $50. O B. the payoffs for both firms investing go to $0. O C. the payoffs for both firms investing increase to $750. O D. the payoffs for both firms investing increase to $350 and the payoffs for both firms not investing decrease to $50. O E. the payoffs for both firms not…arrow_forwardWhat is the mostly commonly used utility functions for the following and why: Risk Aversion Risk Seeking Risk Neutralarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Managerial Economics: Applications, Strategies an...EconomicsISBN:9781305506381Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. HarrisPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics: Applications, Strategies an...
Economics
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning