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.4. In the 1960s Yale University began offering students an alternative to taking out student loans. Instead, students could attend Yale in exchange for a specified percentage of their earnings over a significant length of time. Yale used historical data to determine the percentage so that the program would pay for itself — large payments from high earners would offset the smaller payments from low earners.a. If you were planning on becoming a Wall Street financier, would you be more likely to take out loans or enroll in the Yale program? Why?b. If you were planning on becoming a missionary, would you be more likely to take out loans or enroll in the Yale program? Why?c. The tuition program turned out to be a financial disaster for Yale. Do your answers to (a) and (b) shed light on why? Explain.d. What kind of information problem did the Yale program suffer from?Goolsbee1e_Solutions_Manual_Ch15.indd 210Goolsbee1e_Solutions_Manual_Ch15.indd 21011/15/12 3:10 PM11/15/12 3:10 PM
Asymmetric Information Chapter 15 211SolutionSolutionSolutionSolution5. Toyota regularly takes its own cars in trade for new models. It then subjects them to a rigorous inspec-tion process, fixing defects as it goes, and offers them for sale with an extended warranty. Explain how these procedures help Toyota deal with the adverse selection problem.