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In the late 1990's, care leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the care. If the customer decided to keep the car, the customer would pay a price to the manufacturer, the "residual value", computed as 60% of the new care price. The manufacturer would then sell the returned cars at auction. In 1999, the manufacturer lost an average of $480 on each returned car (the auction price was on average, $480 less than the residual value).

a. Why was the manufacturer losing money on this program?
b. What should the manufacturer do to stop losing money?

Microeconomics, Economics

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