Category: Micro Economics

Accounting argues that opportunity costs should not be considered when evaluating alternatives. Economics believes that opportunity costs should always be considered. With which of these statements do you agree? Why?

Must be done with 0 use of ai and 0 plagiarism, answer must be 2500 words

Section A: Answer the question in this section.

Section B: Answer ONE of the TWO questions in this section.

Section A carries 70 marks;

In section B each question carries 30 marks.

SECTION A

Answer the question in this section.

Question 1

Write a 1700 words essay addressing the following.

The characteristics of labour contracts in the Syldavian agricultural sector

are different to those generally observed in the industrial sector.

Characteristic 1: labour contracts in agriculture pay a fixed wage rate per

hour.

Characteristic 2: labour contracts in industry always include a fix

component and a variable component which positively depends on the

production level of the firm (i.e. a productivity bonus).

In addition, Syldavians who are absent from work due to sickness do not

currently receive any wage or subsidy during their illness, and a survey

has shown them to be willing to pay taxes corresponding to 30% of their

labour income to fund an ill-health benefit to be received when not

working.

The Syldavian government is trying to understand why contracts in the

agricultural and in the industrial sector systematically differ and is planning

to fund an ill-health subsidy out of taxation. To that purpose, the

government invites you to Klow and tasks you with writing a report covering

in the order of your choice the following points:

(a) A brief explanation of the key issue of asymmetric information in terms

accessible to the general public.

(b) A brief explanation of moral hazard and then of adverse selection

problems, underlining how these two problems differ.

(c) A brief explanation of the concept of risk-aversion and how it impacts

the desirable distribution of income in the presence of risk.

(d) An explanation based on informational asymmetries of why the type of

contracts in agriculture and industry may differ.

(e) An assessment of why the results from the survey suggest that the

introduction of a tax-funded ill-health benefit may be a good measure.

Section B: Answer ONE of the TWO questions in this section

Question 2

Write an essay of approximately 800 words addressing the following.

Consider the moral hazard model with two states of nature and two effort

levels presented in the lectures.

In the presence of moral hazard, the principal can still propose the optimal

low-effort contract but chooses instead not to offer the optimal high-effort

contract. Explain why this is the case, and which are the characteristics of

the alternative non-optimal high-effort contract proposed by the principal

under moral hazard. Illustrate your answer with both a mathematical and

a graphical analysis, and relating this analysis to your explanation.

Question 3

Write an essay of approximately 800 words addressing the following.

Consider the adverse selection model of competition in insurance

contracts presented in the lectures.

In the presence of adverse selection, we expect either a separating or a

pooling equilibrium to arise. Explain how the separating and pooling

equilibria differ, and which are the conditions under which we expect one

or the other to arise. Illustrate your answer with both a mathematical and

a graphical analysis, and relating this analysis to your explanation.