1990’s, lawsuits charged Sears with massive fraud in its auto repair centers
Provide qualitative response in a Wordformat and quantitative responses in Excel format.
1. The wood pulp industry is a monopoly in a given location that generates a lot of pollution.
The local government has asked you to hire 3 analysts to help examine several government policy
alternatives. The demand for wood pulp is given by P=500 -10Q, where Q is measured in thousands of
units. The long-run cost of production exhibits constant returns to scale: LAC=LMC=150. Producing a
unit of wood pulp generates one unit of pollution. The marginal external cost is estimated to be 100 per
extra unit of pollution.
a. Analyst A advises no government interventional at all. In this case, what quantity and price
will prevail in the (monopolized) industry?
b. Analyst B is mainly worried about the monopolization of the industry, and therefore,
recommends that you promote competition through a regulation and antitrust policy. What quantity
of pulp would a perfectly competitive industry produce?
Solution:
2. In the early 1990’s, lawsuits charged Sears with massive fraud in its auto repair centers,
alleging that mechanics were convincing customers that they needed expensive repairs when, in fact,
they were unnecessary. Sears entered into a multi-million dollar agreement to settle the case out of
court. In addition to win back business it had lost during the highly publicized case, Sears announced
tht its sales staff would no longer be paid on commission.
a. In your view, were the abuses by the mechanics a result of adverse selection, moral hazard or
both?
b. The management of Sears stated that is was unaware of the abuses. What are the incentives
for management to monitor its employees to prvent such wrongdoing?
c. What is the disadvantage of ending the commission system?
Solution:
3. Just prior to a professional baseball spring training session, you are asked to assess the
probability that a particular baseball team will win the coming World Series.
a. How would you go about making this assessment? In what sense is this assssment subjective?
b. If you knew nothing about baseball, what would be the appropriate probability assessment or
distribution?
c. As an avid fan, how would you adjust this “naïve” assessment? How would your assessment
change day by day as the season progressed?
Solution:
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