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Problemset
Title
Introductory
Text
Graphing and Quantitative Exercises
Question 1
Provide five examples of both formal and informal institutions.
Hint:
Type:
Essay
Question 2
Type:
Essay
Feedback: Answer: Students can think of a set of formal institutions
such as speed limits, use of seat belts, pollution fines, cross
walks and other traffic laws. Some examples of informal
institutions are: the gentleman rule, paying respect to adults
and religious leaders, getting together with family and
friends for special occasions, understanding the role of
women, etc.
Assume that there are good second-hand computers that cost the seller
$300 and are worth $400 to consumers. Also, assume there are bad
second-hand computers that cost the seller $150 but are worth only $100
to the buyer. What would take place if no informational asymmetries
take place?
Hint:
Feedback: Answer: Good computers would sell and deliver a profit of
$100 to the seller and bad computers would not sell because
they would deliver a loss of $50.
Question 3
Type:
Essay
Based on your answer in Question 2, with informational asymmetries, if
30% of the computers are bad and 70% are good, what is the expected
payoff of a risk-neutral agent?
Hint:
Feedback: Answer: A buyer now faces a 30% chance of buying a
computer that is worth $100 and a 70% chance of buying a
computer that is worth $400. The expected payoff of a riskneutral agent is (0.3 * 100) + (0.7 * 400)= $310 for a
computer.
Question 4
Type:
Essay
Based on your answer in Question 2, with informational asymmetries, if
30% of the computers are bad and 70% are good, would a risk-averse
buyer pay more or less than the risk-neutral consumer? Explain.
Hint:
Feedback: Answer: A risk-averse consumer who puts less weight on the
upside payoff than on the downside payoff, would pay less
than the risk-neutral buyer or would possibly not even be
ready to pay more than $100 to buy the computer.
Question 5
Type:
“Lack of investment in agriculture may reflect the existence of
coordination in less developed countries.” Evaluate this statement.
Essay
Hint:
Feedback: Answer: Agents of different production processes may not
trust to fully invest in one of the stages of production for an
agricultural product due to the uncertainty of the needed
complementarity of supporting phases of the entire
production and distribution activities. For instance,
planting and harvesting requires financial and marketing
efforts that may need to come from others. If they are not
there, profits may suffer and production may be affected.