Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 8, Problem 8DQ
To determine
The status – quo bias in insurance policies:
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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.
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
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?
Question 41 options:
a)
No liability
b)
Negligence
c)
Strict liability
d)
Strict liability and negligence provide equivalent incentives
e)
None of the above
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- Moral hazard is a costly behavior because the insured party acts riskier than they would normally, knowing that they’re covered, and insurance companies allow it because they can sell more policies in addition to receiving bailouts from the government. It is natural for moral hazard to happen, but its effects can have consequences. This was seen during the 2007–2008 financial crisis on Wall Street that later led to the Great Recession. Because interest rates were at an all-time low, credit was incredibly cheap, and borrowing money was easier than ever. Borrowers rushed to buy homes, including those who could not previously afford it. Money lenders approved loans and sold them to banks, which were marketed and sold as low-risk investments. The loans were then sold to investors who were looking to make an easy profit. The U.S. Federal Reserve then increased interest rates as the economy was recovering, but as a result, the housing market crashed because people were unable to make…arrow_forwardGive an example, real or imaginary, of a moral hazard problem. Again, your example must clearly point out: what information is private/asymmetric (is it an attribute or an action?) which party has the private information when does the information asymmetry arise (before or after the contract/transaction?) what is the likely outcome and in which way it can be inefficientarrow_forwardConsider two bidders – Alice and Bob who are bidding for a second-hand car. Each of them knows the private value she/he assigns to the car, but does not know the exact value of others. It is common knowledge that the value of other bidders is randomly drawn from a uniform distribution between 0 and $10000. Assume that Alice values the car at $8500 and Bob values the car at $4500. a) If Alice and Bob participated in the second-price sealed bid auction, what would they bid and what would be the result of the auction? Explain your answer. b) If they participate instead in a first-price sealed bid auction, what would they bid and what would be the result of the auction? Explain your answer. c) Calculate and compare the revenue of the seller in the above situations. Which type of auction should the seller use? Explain your answerarrow_forward
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