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Joe was in a bar and saw his friend Sam. Sam had a considerable amount to drink. Sam offered to sell Joe his Porche automobile for only $15,000. Joe made sure to have Sam sign a written agreement to that effect. The next day, Joe went to pick-up the car, but Sam didn’t remember anything about it. Even when Joeshowed him the written agreementsigned by him, Sam refused to deliver the car. Joe sued. Which of the following correctly states the legal position of the parties?

a. If Joe can show that there was no indication that Samwas drunk, even though Sam wascompletely incapacitated, he will be required to go through with the deal.

?b. Sam just has to show he was legally intoxicated and he will not be bound.

c. As long as Joe can produce the agreement in writing, there is nothing Sam can do to get out of the deal. Once Sam has signed the document, he is responsible for its contents.

?d. Sam will not have to go through with the deal because no money has yet changed hands.

?e. Being drunk is no excuse; the contract is binding.

 
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The market for digital cameras is relatively new. Ajax Inc. produces what it

regards as a high-quality digital camera. Knockoff Inc. produces what it regards

as a low-quality digital camera. However, because the market is so new, reputations

for quality have not yet developed, and consumers cannot tell the quality

difference between an Ajax digital and a Knockoff digital just by looking

at them. If consumers knew the difference, they’d be willing to pay $200 for a highquality

camera, and they’d be willing to pay $100 for a low-quality camera. It

costs Ajax $85 to produce a high-quality camera, and it costs Knockoff $55 to

produce a low-quality camera. A recent MBA hire at Ajax suggests that Ajax could differentiate its camera from Knockoff ’s by offering a full-coverage warranty (which would fully

cover any defect in the camera at no cost to the customer). The MBA estimates

that it would cost Ajax $20 per year to offer such a warranty. The MBA also

estimates that it would cost Knockoff $40 per year should Knockoff attempt

to copy Ajax’s warranty strategy. Consumers will feel that the camera with the

longest warranty is high-quality and that with the shortest warranty is lowquality.

The camera companies want to maximize the profit per camera.

What is Ajax’s profit per camera in the digital camera market?

 

 
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No-State Insurance Company has made the following estimate of auto damage

for several groups of potential customers who own cars worth $10,000. There

are an equal number of customers in each group. No-State is risk-neutral.

No-State Insurance Company has made the following estimate of auto damage for several groups of...

State regulation mandates that every customer must pay the same premium

regardless of his or her group, and this premium must be sufficient to cover all

expected claims from those who purchase insurance from No-State. There are

no additional costs to the company other than paying off claims.

All consumers have the following utility function (U) U = W0.5

W is the consumer’s wealth as represented by the value of the car.

What premium should No-State offer for full-coverage insurance?

 

 
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Some people are good drivers, and others are bad drivers. The former have a

10% chance of crashing their cars, and the latter have a 30% chance. All have

a total wealth of 400, but this will fall to 100 if they crash their cars. In other

words, each will lose 300 of wealth if they crash. You are an insurance company

manager who wishes to offer a pair of policies to all drivers. Each policy is

designed to break even (zero profit) given the people who choose to buy that

policy. The first policy has a premium of 90 and covers all losses (it will pay

300 in the event of a crash). The second policy has a premium of 5 and willpay 50 in the event of a crash. Who will buy which policy? Will the insurance company make a profit, break even, or lose money? Each person has a utility function as follows Utility = (Wealth)0.5.

 

 
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