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, manufacturers lost an 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 whether to keep (and purchase at 60% of the new car price) their cars or return their cars. Two years ago, Bob leased a car that was valued new at $16,500. If he returns the car, the manufacturer could likely get $8,415 at auction for the car. Yvette also leased a car, valued new at $16,500, two years ago. If she returns the car, the manufacturer could likely get $11,550 at auction for the car.

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, manufacturers lost an 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 whether to keep (and purchase at 60% of the new car price) their cars or return their cars. Two years ago, Bob leased a car that was valued new at $16,500. If he returns the car, the manufacturer could likely get $8,415 at auction for the car. Yvette also leased a car, valued new at $16,500, two years ago. If she returns the car, the manufacturer could likely get $11,550 at auction for the car.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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, manufacturers lost
an 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 whether to keep (and
purchase at 60% of the new car price) their cars or return their cars. Two years ago, Bob leased a car that was valued new at $16,500. If he returns
the car, the manufacturer could likely get $8,415 at auction for the car. Yvette also leased a car, valued new at $16,500, two years ago. If she returns
the car, the manufacturer could likely get $11,550 at auction for the car.
Use the following table to indicate whether each buyer is more likely to purchase or return the car.
Buyer Keep and Purchase Car Return Car
Yvette
Bob
The manufacturer will lose money (at auction, relative to the residual value of the car) if
purchasing it.
True
Bob
True or False: Setting a more accurate residual price of each car would help attenuate the Yvettes of adverse selection.
O False
returns the car instead of keeping and

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Firms in India are losing productivity because of Facebook. Office staff are spending too long on the social networking site. According to The Associated Chambers of Commerce and Industry (Assocham) employees use Orkut, Facebook, Myspace, and Linkedin for "romancing" and other purposes. On average, employees spend an hour a day on sites like Facebook. This reduces productivity by 12.5%. Nearly half of office employees accessed Facebook during work time. Some 83% saw nothing wrong in surfing at work during office hours. In September 2009 Portsmouth City Council in England banned staff from accessing Facebook on its computers when it was discovered that they spent, on average, 400 hours on the site every month. Question What is meant by productivity? Analyze the impact on a fall in productivity on costs. Analyze the possible consequences for businesses in India of banning access to Facebook and other social networking sites. Do you think access should be denied?
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