1. ECO 550 Week 7 Chapter Questions
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week-7-chapter-questions/
Week 7 Chapter 11 Question 1
1. Why does the assumption of independence of risks matter in the examples of insurance?
What would happen to premiums if the probabilities of houses burning were positively
correlated? Can you think of a situation where they might be negatively correlated?
Week 7 Chapter 11 Question 14
Small firms can discover the abilities of their workers more quickly than large ones
because they can observe the workers more closely at a variety of tasks. Does it then make
sense for people with high abilities to go to small firms? Give some reasons why and some
reasons why not.
Week 7 Chapter 12 Question 4
4. In some ways monitoring is easier in a partnership than a corporation, where
shareholders monitor directors. In what ways is monitoring easier? In what ways is it
not?
Week 7 Chapter 12 Question 11
11. A friend convinces you that she has a great idea for a business, and the two of you
incorporate. You supply her with funds and let her make all of the executive decisions.
Under the agreement you hold 30 percent of the firm’s stock and your friend holds 70
percent. Why should you ever put yourself into a position where your friend’s decision will
carry the day, whether you agree with her or not? What does this tell you about problems
that allegedly stem from separation of ownership and control?