Suppose two customers have leased cars from a manufacturer. Their lease agreements are up, and they are considering whether to keep (and purchase at 60% of the new car price) their cars or return their cars. Two years ago, Hubert leased a car that was valued new at $15,500. If he returns the car, the manufacturer could likely get $7,750 at auction for the car. Eric also leased a car, valued new at $15,000, two years ago. If he returns the car, the manufacturer could likely get $10,500 at auction for the car.

Use the following table to indicate whether each buyer is more likely to purchase or return the car.

Buyer	Keep and Purchase Car	Return Car
Eric
Hubert

The manufacturer will lose money (at auction, relative to the residual value of the car) if returns the car instead of keeping and purchasing it.

True or False: Setting a more accurate residual price of each car would help attenuate the problems of adverse selection.

True

False