Answer the following question:-
College Degrees Required for Police Officers
Many Police Officer positions being advertised today require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don’t police departments increase their applicant pool by dropping this requirement?
Bicycle Insurance and Information Asymmetry
You sell bicycle theft insurance. If bicycle owners do not know whether they are high- or low-risk consumers, is there an adverse selection problem?
“Soft Selling” and Adverse Selection
Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose you’re trying to sell a company a new accounting system that will reduce costs by 10%. Instead of naming a price, you offer to give them the product in exchange for 50% of their cost savings. Describe the information asymmetry, the adverse selection problem, and why soft selling is a successful signal.
Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Would you want to price the extended warranty at 2% of the product price? Discuss both moral hazard and adverse selection issues.
Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there are two types of individuals:those with $60,000 in the bank and those with $5,000 in the bank. Assume that individuals with $5,000 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. What is the actuarially fair price of insurance? What price are individuals with $5,000 in the bank willing to pay for the insurance? Will those with $5,000 in the bank voluntarily purchase insurance? What is the effect of state laws forcing individuals to purchase auto liability insurance?
Extend versus Discrete Problems
Identify which of the following are extent decisions.
Decide whether to expand an existing product into a new region.
What discount should be given on products during the upcoming holiday season>
Should the advertising budget be changed for the upcoming year?
Should you develop a new product for an existing product line?
Game Day Shuttle Service
You run a game day shuttle service for parking services for the local ball club. Your costs for different customer loads are 1: $30, 2: $32, 3: $35, 4: $38, 5: $42, 6: $48, 7: $57, and 8: $68. What are your marginal costs for each customer load level? If you are compensated $10 per ride, what customer load would you want?
Paid for Grades
Children in poor neighborhoods have bleak outlooks on life and do not see much gain to studying. A recent experiment is paying children in poor neighborhoods $100 for each “A” they earn in a six-week grade reporting cycle. How does this affect behavior?
A copier company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two copiers, and output increased by 100,000 pages per day. One month ago, it added five workers, and productivity also increased by 50,000 pages per day. Copiers cost about twice as much as workers. Would you recommend it hire another employee or buy another copier?
George’s T-shirt Shop
George’s T-Shirt Shop produces 5,000 custom printed T-shirts per month. George’s fixed costs are $15,000 per month. The marginal cost per T-shirt is a constant $4. What is his breakeven price? What would be George’s breakeven price if George were to sell 50% more shirts?
Doctor’s Human Capital
Probably the most important source of capital is human capital. For example, most medical doctors spend years learning to practice medicine. Doctors are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work. In Canada, the government nationalized the healthcare system and reduced doctors’ compensation. Is this a form of post-investment hold-up?
In the late 1990s, 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, the manufacturer lost an average of $480 on each returned car (the auction price was, on average, $480 less than the residual value).
Why was the manufacturer losing money on this program?
What should the manufacturer do to stop losing money (while still leasing cars)?