2-1 Airline DelaysHow will commercial airlines respond to the threat of new $27,500 fines for...

Question

2-1 Airline DelaysHow will commercial airlines respond to the threat of new $27,500 fines for keeping passen­gers on the tarmac for more than three hours? What inefficiency will chis create? 2-2 Selling Used CarsI recenrly sold my used car. If no new produc­tion occued for this transaction, how could it have created value? 2-3 Flood InsuranceThe U.S. government subsidizes flood insurance ecause those who want co buy ir live in rhc flood plain and cannot get it at reasonable rates. What inefficiency does this subsid)c create? ap82Highlightap82Highlight

Ayushi · Accepted Answer

7
Individual Problems
Contents
1-1	3
1-2	4
1-3	4
2-1	4
2-3	5
References:	6
1-1
a. Assumptions made:
Base salary of Vice president: 50000
If P=150000, then C=50000+0.75(150000)+0.10(P), C=162500+0.10(P)
	Profit 
	Compensation of VP
	0
	50000
	50000
	87500
	100000
	125000
	150000
	162500
	175000
	180000
	250000
	187500
	300000
	192500
b. Purchase price=4.5x profit
Purchase profit= 1000000-4.5(annual profit)
	Annual profit
	Purchase profit
	125000
	9437500
	250000
	8875000
	500000
	7750000
	750000
	6625000
	1000000
	5500000
	1250000
	4375000
	1500000
	3250000
	2000000
	1000000
1-2 
No, the profit sharing and the purchase price of the contract create unexpected incentives. The portion kept by the vice president consists of $0.75 of each dollar which is earned up to $150000 and $0.10 of each dollar which is earned after $150000.

2-1 Airline Delays How will commercial airlines respond to the threat of new $27,500 fines for keeping passen gers on the tarmac for more than three hours? What inefficiency will chis create? 2-2...

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2-1 Airline Delays How will commercial airlines respond to the threat of new $27,500 fines for keeping passen­ gers on the tarmac for more than three hours? What inefficiency will chis create? 2-2...

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2-1 Airline Delays How will commercial airlines respond to the threat of new $27,500 fines for keeping passen gers on the tarmac for more than three hours? What inefficiency will chis create? 2-2...