Business economics - Seminar 3 (2015)Pràctica Inglés
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PROBLEM SET 3
a) Full Risk Company has one big problem: distinguish between good types and bad ones. So
bad types are unhealthy people, with many health risks and good ones are healthy people;
so if the company offers only a kind of insurance to everybody, the good ones would not go
to trade with Full Risk, but the bad ones will go to have an insurance, due to their risks are
so high and the probability of having an accident is so high.
So, the Company will have a situation where unhealthy people will make the contract with it, but healthy ones not.
So it will be so important to make an effort to distinguish people in between, making signalling (forcing everyone to do a medical check), pooling (forcing everyone to make insurance) and screening (making the contract unattractive to bad types).
b) Bad types will behave opportunistic, so they will be agents and the insurance company will became the principal one. So in fact, the situation will be this: all bad types will have not the same care on their health, due to they have an insurance, but also good types will be even more kamikaze, due to the problem on “who will pay my house to my children if their father dies?” will be lower, so the concern on this topic goes down, because people feel safe, so they could be more unconcerned.
c) Because one part knows something that other does not. So they might think that they know the same, but in fact it could not, due to the information is not the same and they have different types of information, so this means that they have different points of view on this.
PROBLEM 2 a) If everyone will know the same, the equilibrium price will be 400 for good PC (due to the seller wants 350 minimum and the buyer will not pay more than 450) and for the bad types, the price will be of 175 (because of sellers want more than 150 and buyers will pay up to 200).
b) The buyers will pay the price of suppliers for its computer; due to there is uncertainty because we do not know if a computer is a good choice. On the other hand the sellers will sell its computers for 350, due to it is possible to have a god one. So the supply will be at 350, so the good ones cannot make profit and the bad ones will have 200 Euros profit per unit.
c) If seller knows how is his computer, he is the agent, so he has more information than buyer, so he can sell a bad PC as good, so the buyer will pay more than the real price; 350.
Eduardo 2015 d) First one will be to go to an expert to check our own computer and having a certificated about how is our computer. So we can know which are good and which bad ones are. This could be Signalling.
Secondly, it could be a clause, so if you have sold a bad PC, for more than its price, you should give back the money to the buyer. This could be Screening.
PROBLEM 3 a) Lehman Brothers knew that if they crash all bank system, the State will go after the success to rebuild all banks and giving money to solve the problem, so there is a kind of moral hazard, due to the bank knows that it is insurance by the government which will pay all debts if it crashes. So there is opportunism.
US government gave money to banking system, because they know that nobody could solve this situation, despite government.
Rating agencies were with asymmetric information, so they could not know everything about corrupt banks, so they were speculating with its part of information, but they were principals and Lehman Brothers, was the agent.
b) This incentive was wrong when bank chiefs manipulated numbers to continuing having paying for its performances. So the performance pay was a problem, due to the competition went to deceive to everybody.
If banks would have a regulation system and a compensation program, if they cheat or stole, then it could be a minimum level of certainty, due to the fact that moral hazard will be lower than before.
c) I don’t know PROBLEM 4 a) When the price of producing is higher than buying something, it is better to buy.
b) When a competitor of you buy the same that you need to the same-other-firm, to make him lose, you should think to avoid trading with him to increase his costs, so to reduce the profit of others.
PROBLEM 5 Vertical integration will be useful if this product is so demanded by population, so the company could make profit if it “design”, produce and sell its product to others.