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 twoyears, 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% Df the new car price. The manufacturer would then sell the retumed cars at auction. In 1999, manufacturers lostan 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 whetherkeep (andpurchase at 60% of the new car price) their cars or return thelr cars. Two years ago, Becky leased a car valued new at $18,500. If she returns the car,the manufacturer could likely get $12,950 at auction for the car. Eleen also leased a car, valued new at $19,000, two years ago. If she returns the car,the manufacturer could likely get $9500 at auction for the car,Use the following table to Indicate whether each buyer is more Iikely to purchase or retum the car.BuyerKeep and Purchase CarReturn CarBeckyEleenThe manufacturer will lose money (at auction, relative to the residual value of the car) Ifreturns the car Instead of keeping andpurchasing it.True or False: Setting a more accurate residual price of each car would help attenuate the problems of adverse selection.O TrueO False

Opportunity costs address the potential advantages that an individual, financial backer, or business…

cdon. In 1999, manufacturers lost $480 on each returned car (the auction price was, on average, $480 less than the residual value). customers have leased cars from a manufacturer. Their lease agreements are up, and they are considering whether to keep (and D% of the new car price) their cars or return their cars. Two years ago, Becky leased a car valued new at $18,500. If she returns the car, urer could likely get $12,950 at auction for the car. Eleen also leased a car, valued new at $19,000, two years ago. If she returns the car, rer could likely get $9,500 at auction for the car, Ing table to Indicate whether each buyer is more Iskely to purchase or retum the car. ep and Purchase Car Return Car urer will lose money (at auction, relative to the resldual value of the car) if V returns the car Instead of keeping and Setting a more accurate residual price of each car would help attenuate the problems of adverse selection.

cdon. In 1999, manufacturers lost $480 on each returned car (the auction price was, on average, $480 less than the residual value). customers have leased cars from a manufacturer. Their lease agreements are up, and they are considering whether to keep (and D% of the new car price) their cars or return their cars. Two years ago, Becky leased a car valued new at $18,500. If she returns the car, urer could likely get $12,950 at auction for the car. Eleen also leased a car, valued new at $19,000, two years ago. If she returns the car, rer could likely get $9,500 at auction for the car, Ing table to Indicate whether each buyer is more Iskely to purchase or retum the car. ep and Purchase Car Return Car urer will lose money (at auction, relative to the resldual value of the car) if V returns the car Instead of keeping and Setting a more accurate residual price of each car would help attenuate the problems of adverse selection.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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