In the late 1990s, car 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 car....

In the late 1990s, car 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 car.  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 car 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).

• Why was the manufacturer losing money on this program?


• What should the manufacturer do to stop losing money (while still leasing cars)?