Attempts Average: /2 1. Individual Problems 19-1 In the late 1990s, car leasing
ID: 1158548 • Letter: A
Question
Attempts Average: /2 1. Individual Problems 19-1 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 a auction. In 199, manufacturers ost 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, Caroline leased a car that was valued new at $20,000. If she returns the car, the manufacturer could likely get $10,000 at auction for the car. Valerie also leased a car, valued new at $19,000, two years ago. If she returns the car, the manufacturer could likely get $13,300 at auction for the car. Use the following table to indicate whether each buyer is more likely to purchase or return the car. Buyer Valerie Caroline Keep and Purchase Car Return Car The manufacturer will lose money (at auction, relative to the residual value of the car) if purchasing it. returns the car instead of keeping and Caroline True or False: Setting a more accurate residual price of each car would help attenuate th valerie of adverse selection. True False Grade It Now Save & ContinueExplanation / Answer
Ans
Valerie will return car since it will return less in case it is sold
Caroline will keep and purchase since in case it's sold it will have good reselling value compared to cost
Valerie
It is true. Adverse selection is reduced by more accurate prices because it was caused in the first place by wrong information about value of car
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