What three factors led to the mortgage default crisis?
What will be an ideal response?
First, banks became quite lax in their lending standards because they thought that they were not exposed to mortgage default risk. Second, government programs encouraged more renters to purchase houses through subsidies and other incentives even if the renters had limited financial capability to repay the mortgages. Third, housing prices also had increased substantially and this development led to overbuilding and over-buying of houses. In short, too many people were given mortgages and assumed mortgage risks which they could not handle. Once housing prices started to fall, the economy moved toward recession and unemployment rose, and the many homeowners with limited financial means could no longer afford to cover their mortgage payments and defaulted on their mortgages.
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Refer to Pollutants. Suppose transactions costs preclude the possibility of private bargaining between the chemical plant and the farm. Which liability rule will not result in an efficient outcome?
A chemical plant's production adds pollutants to a stream which irrigates a farm's crops. The pollutants damage the farm's crops, increasing the firm's costs by $800 per month. The crop damage may be eliminated in two ways: the chemical plant can install a new filtering system costing $300 per month, or the farm can install a new irrigation system costing $600 per month. a. The chemical plant bears all liability for the crop damage. b. The farm bears all of the costs of the crop damage. c. The chemical plant bears 50% of the liability, while the farm bears the other 50% of the crop damages. d. The Coase Theorem guarantees that any assignment of liability will result in an efficient outcome.
Which is the most likely effect upon the market for cotton of an increase in production costs due to higher oil prices?
A) A decrease in demand and hence a decrease in both the price of cotton and the quantity exchanged. B) A decrease in supply and hence a decrease in both the price of cotton and the quantity exchanged. C) A decrease in supply and hence an increase in the price of cotton and a decrease in the quantity exchanged. D) A decrease in both supply and demand and hence a decrease in the quantity exchanged but no predictable change in the price of cotton.
Price discrimination is a rational strategy for a profit-maximizing firm when
A) it is possible to engage in arbitrage across market segments. B) there is no opportunity for arbitrage across market segments. C) it is not possible to segment consumers into identifiable markets. D) firms want to increase the amount of consumer surplus received by its customers.
Situation 35-2 ? Dan and Ann live in the same community and both can participate in two activities, producing and stealing. Refer to Situation 35-2. Both Dan and Ann realize that they are better off producing and not stealing from each other than producing and stealing from each other. They agree not to steal from each other. There is no enforcer of their agreement to not steal. It is likely that
A. Dan and Ann are in a prisoner's dilemma setting. B. Dan is in a prisoner's dilemma setting but Ann is not. C. Ann is in a prisoner's dilemma setting but Dan is not. D. neither Dan nor Ann is in a prisoner's dilemma setting.