Complete the individual problems and submit your solutions using Turnitin. It is not necessary to restate the exercise/prompt, but to provide a thorough write-up of your response/solution. Submit answers only in a Word document or PDF. Use APA format for all external references.
Chapter 17: Making Decisions With Uncertainty
17-2 Game Show Uncertainty
In the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million to $2 million. If they are wrong, their prize is decreased to $500,000. A contestant thinks his guess will be right 50 percent of the time. Should he play? What is the lowest probability of a correct guess that would make playing profitable?
Chapter 18: Auctions
18-4 Asset Auctions in Sweden
In Sweden, firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder. (There is no reorganization through Chapter 11 bankruptcy.) The current managers are often the high bidders for the company. Why?
Chapter 19: The Problem of Adverse Selection
19-1 Leasing Residuals
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 percent 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).
A. Why was the manufacturer losing money on this program?
B. What should the manufacturer do to stop losing money?
Chapter 20: The Problem of Moral Hazard
20-1 Extended Warranties
Your product fails about 2 percent 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 percent of the product price? Discuss both moral hazard and adverse selection issues.
20-3 Locator Beacons for Lost Hikers
Lightweight personal locator beacons are now available to hikers that make it easier for the Forest Service’s rescue teams to locate those lost or in trouble in the wilderness. How will this affect the costs that the Forest Service incurs?
Parameters: Submit a Word document or PDF and use APA format. No handwritten submissions.
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