For a Lease in Which the Lessor Bears the Risk

question 28

Essay

For a lease in which the lessor bears the risk of the residual value,why does the lease improve incentives and lower agency costs when the lessor is the manufacturer of the asset?

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Definitions:

Marginal Cost

The expense associated with manufacturing an extra single unit of a product or service.

Quantity Sold

This refers to the total amount of a product or service that is sold within a given time period.

Perfect Competitor

An idealized market structure in which many firms sell identical products, there is free entry and exit, and all buyers and sellers are fully informed, leading to efficient outcomes.

MC = MR

In economics, the principle that profit maximization occurs when marginal cost (MC) equals marginal revenue (MR), guiding firms in their production decisions.