Scenario by jizhen1947

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									                                       Case 1.a
                                     Morris, the Car



This case analyzes the demand for relevant and reliable information about the condition
of a car---a 1989 Morris (possibly owned by Mr. Bean). In all three independent
scenarios described below, the car and owner are the same, but the party interested in the
condition of the car, the mechanic who improves the quality of information about the
car’s condition, and the contract with the mechanic vary. The case illustrates conflicting
interests, the role of measurement criteria, and the value of an independent assurance
professional’s services.

Nigel and Morris, the car:

       a) Scenario 1: Driving to Dundee – Nigel is an accounting clerk studying to
          the a chartered accountant. Nigel lives in London and is planning to drive
          Morris, the car, to visit a “close friend” in Dundee, Scotland. Nigel is
          concerned that, due to the distance to Dundee, the Morris won’t successfully
          complete the round trip. He is especially concerned about the cooling system
          and brakes (he must traverse the Southern Uplands in Scotland to reach
          Dundee). Nigel has decided to seek a mechanic’s opinion about the condition
          of the car.

            If you were Nigel:

                  what characteristics would you seek in a mechanic?
                  what instructions would you give the mechanic (e.g. what would you
                   ask him or her to test, measure or evaluate)?
                  how much would you willing pay the mechanic (or how would you
                   calculate the “value” his or her services)?
                  is the “contract” between Nigel and the mechanic for information
                   origination, investigation, or certification?

            Be prepared to explain your reasoning.

       b) Scenario 2: Selling Morris the Car – Nigel is trying to sell Morris, the car.
          Based on comparable cars, he believes that £1,200 is a fair price and he
          advertises it at that price in the Telegraph and Mail.

            The first potential buyer to respond to the advertisement is Penelope.
            Penelope likes the Morris and believes that Nigel’s asking price of £1,200 is
            reasonable---if it has no hidden defects. She is particularly concerned about
            the condition of the cooling system and the brakes, but is fearful that other
            things might be defective too.




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            Nigel tries to convince Penelope that the car is in good condition---but he is
            unsuccessful. Furthermore, he feels that he can’t “guarantee” to repair
            anything that fails over a future period. Finally, he asks her what she’ll pay
            “as is.” Penelope says £900.

            Because several potential buyers (also fearing hidden defects) have balked at
            the £1,200 price, Nigel decides to hire a mechanic to test Morris and he will
            furnish a copy of the mechanic’s report when he shows the Morris to a
            potential customer.

            If you were Nigel:

                  how would your choices of measurement criteria and mechanic
                   characteristics differ from those made in scenario a)?
                  what is the likely selling price of the car (assuming that the mechanic
                   issues a favorable report on the condition of the Morris (i.e., no hidden
                   defects))?
                  what can Nigel afford to pay the mechanic?
                  what is the form of the contract between Nigel and the mechanic?
                  is Nigel likely to be better off with assurance services? Is the buyer?

       c) Scenario 3: Moving to Montreal – Nigel is being transferred to the
          Montreal, Canada office of his firm. He takes Morris with him, but on arrival
          in Montreal finds that under Quebec law he must have a safety inspection
          report for the Morris before he can buy a license tag and drive it on Canadian
          streets and highways. In particular, the car must pass a 10-point safety check
          conducted by a mechanic approved by the provincial government o f Quebec.
          The province-authorized inspection fee is C$25.

            If you were Nigel:

                  what qualifications would you seek in a mechanic to inspect your car?
                  would the mechanic’s fee be a consideration, and would you specify
                   any additional tests or measurement criteria beyond those specified by
                   the government of Quebec?
                  If you were the Transport Minister for Quebec’s Motor Vehicles
                   Division, would you like the implications of your answers to the first
                   two questions?
                  what is the form of contract between Nigel and the mechanic (i.e.,
                   information origination, investigation, certification)?

*Note: the worksheet at the end of this case can be used to summarize the major points
above.




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Max, the mechanic:

Now, let’s consider the behavior and incentives of Max, the mechanic. Max inspects cars
and also operates a shop that can repair cars.

                 What are Max’s incentives to be viewed by potential customers as
                  “trustworthy” in his “inspection” of a car? That is, is Max someone
                  who will do the inspection work that he promises to do, and report
                  what he finds---even if it is bad news to his employer.
                 Is Max’s reputation for competence and trustworthiness as an
                  inspector more important in scenario a) or scenario b)?
                 What risks do Max take on being an “assurer” for Nigel?
                 Does the fact that Max might also repair any defects he finds affect his
                  need for a reputation for being competent and trustworthy as an
                  inspector?




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Blank due to Microsoft word.




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                                                                 Case 1.a
                                                              Morris the Car
                                                 Main Scenario Discussion Points Worksheet


                                                                                      Scenario

                                                                     1                     2                3
                                                            Driving to Dundee       Selling Morris   Move to Montreal
1. Form of “assurance” contract with mechanic

2.a Competence of mechanic

2.b Trustworthiness of mechanic

3.0 Instructions to mechanic (or measurement criteria)

4.0 What would you pay the mechanic (maximum)?

5.a Who receives the benefit or “value” of the
assurance service?

5.b Who “pays” or bears the out-of-pocket cost of the
assurance service?




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