International Economics

You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can’t distinguish among them:Employee ValueProbability$65,0000.1$82,0000.1$99,0000.1$116,0000.1$133,0000.1$150,0000.1$167,0000.1$184,0000.1$201,0000.1$218,0000.1

The expected value of hiring one employee is.

Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value.

The expected value of an employee who would apply for the position, at this salary, is.

Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is

$65,000,/99,000,/82,000,/116000

5 . Individual Problems 19-1In 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, Beth leased a car that was valued new at $14,000. If she returns the car, the manufacturer could likely get $7,140 at auction for the car. Tim also leased a car, valued new at $19,500, two years ago. If he returns the car, the manufacturer could likely get $13,650 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 CarTim

Beth

The manufacturer will lose money (at auction, relative to the residual value of the car) if

returns the car instead of keeping and purchasing it.
True or False: Setting a more accurate residual price of each car would help attenuate the problems of adverse selection.True

False