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1. Bicycle Insurance and Information Asymmetry
If bicycle owners do not know whether they are high-or low-risk consumers, is there an adverse selection problem?
2. 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?
3. Describe a moral hazard problem your company is facing. What is the source of the asymmetric information? Who is the less informed party? Are there any wealth-creating transactions not consummated as a result of the asymmetric information? If so, could you consummate them? Compute the profit consequences of any advice.
In an article about the financial problems of the USA today, Newsweek reported that the paper was losing about $20 million a year.
Explain why a monopolist will never set a price (and produce the corresponding output) at which the demand is price-inelastic.
Draw a correctly labeled loanable funds graph that shows what happens to real interest rates.
According to economist, if savings equal $5 trillion and spending equals $100 trillion, what will investment equal?
Discuss how the aggregate expenditure function shifts in response to changes in each of time following variables:
How many cases of peaches will be produced per week during the growing season, and what will the selling price per case be if producers ignore the marginal external costs imposed on others?
Suppose you want to produce WIDGETS in your country. The international price of an imported WIDGET is $50 and pays an import tariff of $10 per unit. Three inputs are needed to produce a WIDGET.
Use the IS/LM model and the IS-PC-MR model to explain what monetary policy to pursue.
Discuss the short-run movement toward equilibrium in the currency markets in a flexible exchange system.
Allan Sports sells snowmobiles in a Northern Suburb of the Twin Cities. For the third year in a row sales have been dismal.
The advent of the one man bus involved more capital equipment: an automatically operated coin box and door control device - to name two of the capital goods that replaced the conductor."
Consider the Figure below that represents a perfectly competitive firm
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