1.(Bounds of the Firm) Ashland Oil, Inc., buys its crude oil in the market. Larg
ID: 1097917 • Letter: 1
Question
1.(Bounds of the Firm) Ashland Oil, Inc., buys its crude oil in the market. Larger oil refiners, such as Texaco, drill for their own crude oil. Why do some oil companies drill for their own crude oil and others buy crude oil in the market?
2. (Economies of Scope) Distinguish between economies of scale and economies of scope. Why do some firms produce multiple product lines, while others produce only one?
3. (Asymmetric Information) Define asymmetric information. Distinguish between hidden characteristics and hidden actions. Which type of asymmetric information contributes to the principal-agent problem?
4. (Signaling) Give an example of signaling in each of the following situations.
a. Choosing a doctor
b. Applying to graduate school
Explanation / Answer
1. (Bounds of the Firm) Ashland Oil, Inc., buys its crude oil in the market. Larger oil refiners, such as Texaco, drill for their own crude oil.Why do some oil companies drill for their own crude oil and others buy crude oil in the market?
q. (Adverse Selection and Moral Hazard) Describe the problems faced by health insurance companies as a result of adverse selection and moral hazard. How do insurance companies try to reduce these problems?
q. (Signaling) Give an example of signaling in each of the following situations.
a. Choosing a doctor
b. Applying to graduate school
ans
Just my suggestions:
1.
- if you want to drill oil, you need a oil-field, so if you have none and have just refinery, you have to buy crude oil on the market
- oil drilling is capital and technological demanding and licenses are only on large fields
So, in my opinion, small company can run refinery only, and large one oil drilling or both
2. some examples
moral hazard - if you are insured you can smoke or do adrenaline sports, because you know that insurace company bears costs in troubles...
IC can offer you some bonus or discount if you don't smoke or except injury during sport from insurance
adverse selection - if you are health, you have small motivation to insure yourself, so in IC only goes people who are not so health, they are costly for the comany, so it must increase rates which demotivate another almost healty persons
solving of this is to do screening of insuree and differentiate insurance rates
3.
Signal of doctor is diploma on his wall
Applying to g s: if you have had some good results (in some competitions or so) you can mantion it in your CV or motivation letter, if poor you don't mention you take a part on it at all
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