those with $60,000 in the bank and those with $5,000 in the bank. Assume that individuals with
$5,000 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive
only what individuals have in the bank. What is the actuarially fair price of insurance? What price
are individuals with $5,000 in the bank willing to pay for the insurance? Will those with $5,000 in
the bank voluntarily purchase insurance? What is the effect of state laws forcing individuals to
purchase auto liability insurance?

Week 8
Chapter 21
Multiple Choice Key
1. c
2. b
3. d
4. b
5. b
6. a
7. c
8. d
9. c
10. b
Short Answer
21-1 Real Estate Agents
When real estate agents sell their own, rather than clients
’
, houses, they leave the houses on the
market for a longer time (10 days longer on average) and wind up with better prices (2% higher
on average). Why?

21-3 Incentive Conflicts
Which of the following are characteristic of principal-agent conflicts that often exist in a firm?
Chapter 22
Multiple Choice Key

Short Answer
22-1 Transfer Pricing
Suppose that a paper mill
“
feeds
”
a downstream box mill. For the downstream mill, the marginal
profitability of producing boxes declines with volume. For example, the first unit of boxes
increases earnings by $10, the second $9, the third $8, and so on, until the tenth unit increases
profit by just $1. The cost the upstream mill incurs for producing enough paper to make one unit
of boxes is $3.50.

transfer price (the price the box company pays the paper mill), what price will it set, and
how much money will the company make?