chapter 11 question 1 and 14
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?
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 reason why and some reasons why not.
4. in some ways monitoring is easier in a partnership than a corportion, where shareholders monitor directors. In what ways is monitoring easier and what ways its not.
11. A friend convines 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 firms stock and your friend holds 70 percent. Why should you ever put yourself into a position where your friends decision will carry the day whether you agree with her or not? what does this tell you abount problems that allegedly stem from seperation of ownership and control?
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