Solns Ch15,18,19 - Ch. 15 solutions. 1. Finl intermediaries...

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Ch. 15 solutions. 1. Finl intermediaries take advantage of economies of scale and thus lower transaction costs. Mut funds take advantage of lower commissions because the scale of their purchases is higher than for an individual, while banks’ large scale allows them to keep legal and computing costs per transaction low. Economies of scale permit intermediaries to lower transaction costs; this in turn explains why financial intermediaries exist. 3. No. If the lender knows as much about the borrower as the borrower does, then the lender is able to screen out the good from the bad credit risks -- adverse selection would not be a problem. And if the lender knows what the borrower is up to, then moral hazard will not be a problem because the lender can easily stop the borrower from engaging in moral hazard. 5. Less severe for those listed on the NYSE because they tend to be larger corporations which are better known in the market place. So it is easier/cheaper to get info about them and figure out whether the firm is of good quality or is a lemon -- making the adverse
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This note was uploaded on 09/08/2010 for the course BUS 171A at San Jose State University .

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Solns Ch15,18,19 - Ch. 15 solutions. 1. Finl intermediaries...

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