Socially conscious investors screen out stocks of alcohol and tobacco makers, firms with poor environmental records, and companies with poor labor practices. Some examples of "good," socially conscious companies are Johnson and Johnson, Dell Computers, Bank of America, and Home Depo

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 6MC

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Use the following data to answer all of the remaining questions. Consider a commodity market where the products provided by all sellers are identical. A group of 12 potential buyers in this market have willingness to pay (WTP) as follows (in random order): $65, $60, $55, $80, $70, $30, $20, $55, $10, $45, $40, and $15. A group of potential suppliers serving this market have wiliness to accept (WTA) as follows (also in random order): $20, $25, $30, $10, $45, $50, $55, $15, $20, $30, $40, and $60. Basics What is the equilibrium price? How many units will be sold? How many sellers will not engage in a transaction? What is the total value created by all the transactions? Sellers What is the producer’s surplus in this market for an individual seller with a WTA = $25? What is the value captured by all sellers? Buyers What is the value captured in this market by an individual buyer with WTP = $80? What is the total consumers surplus (i.e., all buyers) in this…
Suppose that the Long-Life Health Insurance Firm charges $5,000 annually for a family insurance policy. An advisor suggests that the company raise the annual price to $6,000 to increase its profits. If the firm followed this suggestion, what economic problem might arise? Would the firm’s pool of customers tend to become more or less healthy on average? Would the company’s profit necessarily increase?
Suppose that the typical inverse demand for trips to the dentist by a patient is given by p=1000-200q. Assume that there are lots of patients. Dentists charge $400 per visit, either to the insurer or to the patient, and this represents their average cost per visit. If there is an insurer, it charges a premium which comes straight out of the wealth of consumers. Assume that the premium is fair and reflects use of dental visits by all consumers, not just the specific consumer. (a) Find the optimal number of visits that would happen in order to maximize consumer welfare less the costs of dentistry. (b) Suppose that the insurer covers 50% of the dental cost. Does this lead to an increase/decrease in consumer welfare (i.e. the sum of consumer surplus less premiums)? Show how much.
The Centers for Disease Control and Prevention (CDC) has a new vaccine against a disease and are trying to determine the optimal percentage of the population that should be vaccinated. They do not recommend vaccinating the whole population against the smallpox virus because the vaccine has undesirable, and sometimes fatal, side effects. Suppose the following table gives the data about the effects of the vaccine. Percent of population Deaths Due to Deaths due to Marginal Marginal Cost vaccinated Disease vaccine side Benefit of the of the Vaccine effects Vaccine (extra (extra deaths lives saved by due to side vaccine) effects) 0% 200 0 NA NA 10% 180 10 20% 160 25 30% 140 55 40% 120 95 50% 100 140 60% 80 200 a. Calculate the Marginal Benefit (in terms of how many extra lives are saved by the…
Can you change the payoffs in the table to the right so that the firms choose to invest in safety? Each firm must consider how safe to make its plant. Extra safety is costly. Safety investments-sprinkler systems, color-coded switches. fire extinguishers-by one firm provide an externality to other firms: That firm's lower incidence of accidents reduces the wage that all firms in the industry must pay. Because each firm bears the full cost of its safety investments but derives only some of the benefits, the firms underinvest in safety. It will be a Nash equilibrium for both firms invest safety if O A. the payoffs for both firms investing increase to $750 and the payoffs for both firms not investing decrease to $50. O B. the payoffs for both firms investing go to $0. OC. the payoffs for both firms investing increase to $750. O D. the payoffs for both firms investing increase to $350 and the payoffs for both firms not investing decrease to $50. O E. the payoffs for both firms not investing…
(A) Suppose that the two firms merge. Write down the profit function of the merged firm. Calculate the profit maximizing level of output, the amount of pollution for the merged firm, and its profit. Is the merger Pareto improvement? Why or why not? (B) Suppose that the merger is forbidden by the government. Instead, now the fishery has the property right to water. In other words, anybody who wants to pollute the water needs to buy a pollution right from the fishery. Let the price of the pollution right be Px. Write down the steel mill’s new profit function and the fishery’s new profit function. (C) Calculate the profit maximizing level of output for each firm, the amount of pollution, and the price of pollution right. please, please answer the three questions together..
Rod's Auction House holds sealed-bid auctions for used computers every Tuesday. Each used computer is sold to the highest bidder at the second-highest bidder's bid. On average, half of the computers sold at Rod's Auction House are lemons, and half are good, used computers. A good, used computer is worth $750 to any buyer, and a lemon is worth only $200.Buyers are allowed to look over the used computers for a few minutes before they are auctioned. Almost all the buyers who attend the auction can do no better than random choice at picking good computers from among the lemons. The only exception is Al. Al can sometimes, but not always, detect a lemon by touching the tower and feeling its vibrations. The vibrations generated by a good computer's tower are always very regular and soft. On the other hand, the tower of 1/3 of the lemons emits very irregular and strong vibrations, while the tower of the remaining 2/3 of the lemons emits vibrations that are no different from those of a good…
A horizontal merger is a merger between firms that produce and sell the same products. When one firm wants to buy another firm, the buyer must obtain approval from the U.S Department of Justice and the Federal Trade Communication. These agencies are charged with evaluating the impact of the merger on market participants and have the power to approve or deny any merger. To evaluate the impact of the merger, the agencies use the Herfindahl Hirschman Index (HHI) to study changes in competition. It's important to note that the agencies evaluate other market factors as well. Firms Dollar Tree Dollar General Family Dollar 99 Cent Only Store Dollar Wow Dollar Central a.) Calculate the HHI for the industry. Show work. Market Sales ($ millions) 12 10 8 8 10 2 b.) Assume that Dollar Tree would like to buy (merge with) Dollar Central. Calculate the post-merger HHI. Show work. c.) Assume the Federal Trade Commission uses the following rule: AHHI < 100 → Merger will be approved. AHHI ≥ 100 → Merger…
A horizontal merger is a merger between firms that produce and sell the same products. When one firm wants to buy another firm, the buyer must obtain approval from the U.S Department of Justice and the Federal Trade Communication. These agencies are charged with evaluating the impact of the merger on market participants and have the power to approve or deny any merger. To evaluate the impact of the merger, the agencies use the Herfindahl Hirschman Index (HHI) to study changes in competition. It's important to note that the agencies evaluate other market factors as well. Firms Dollar Tree Dollar General Family Dollar 99 Cent Only Store Dollar Wow Dollar Central a.) Calculate the HHI for the industry. Show work. Market Sales ($ millions) 12 10 8 8 10 2 b.) Assume that Dollar Tree would like to buy (merge with) Dollar Central. Calculate the post-merger HHI. Show work. c.) Assume the Federal Trade Commission uses the following rule: AHHI < 100 → Merger will be approved. AHHI ≥100 → Merger…
Screening and Imperfect Information Asymmetric information refers to a market where one side (either the buyer or the seller, but usually the buyer) has less information than the other side of the market. When there is asymmetric information in a market, markets are inefficient because the side with less information doesn't want to take the risk involved in buying (or selling) the good or service. One method of solving this problem is through screening. Screening is a strategy one uses when they don't have information. A screen can be any indicator that lets the screener know if the good or service is reliable and will meet the screener's wants. • Offer an example of when you used screening to solve a lack of information. What kind of screen did you use? • Was the screen effective? Were you happy with the result?
The solar roof panel industry has really taken off in recent years. Homeowners typically will make the decision whether to purchase solar panels for their roofs based on the price of the solar panel and the perceived private benefit, which includes lower energy costs of powering their homes. In addition to the private benefits of solar roof panels, there are also large societal benefits in the form of reduced dependence on fossil fuels (coal, oil, etc.), which create more pollution than solar energy sources. Unfortunately, homeowners don't consider these societal benefits when deciding whether or not to purchase solar roof panels. 1. Assuming perfect competition, use the space below to graph the market for solar roof panels. The graph does not need to include specific numbers or values but should include: a) Clearly-labeled x- and y-axis b) A clearly-labeled supply curve c) A clearly-labeled private marginal benefit (or demand) curve d) A clearly-labeled social marginal benefit curve…
Exercise 5bis: Collusion with asymmetric costs and Bertrand competition Two firms compete in a market for a homogeneous product. In this market there are N=1 consumers (the normalization N=1 eliminates one parameter); each consumer buys one unit if the price of the product does not exceed 10, and nothing otherwise. Consumers buy from the firm selling at the lowest price. Assume also that firm 1 has lower marginal costs: c1=0