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economics 14th global

Questions and Answers of Economics 14th Global

What is a means-tested program?LO5
Identify the major programs that are considered to be social insurance.LO5
Identify several private programs and techniques that can reduce economic insecurity.LO5
Identify several public programs and techniques that can reduce economic security.LO5
For each of the following events, identify a private technique or public program that could reduce economic insecurity that might result from the event:a. A male construction worker, age 28, with
Explain the basic principles and characteristics of the Old-Age, Survivors, and Disability Insurance (OASDI) program.LO1
Show how the OASDI program is insurance.LO2
Explain how social insurance programs differ from private insurance.LO3
Explain how social insurance programs differ from public assistance programs.LO4
Describe the economic objectives of social insurance programs.LO5
Describe briefly what economists call a multitask agency problem, and relate your answer to the case of microfinance. Describe the main tasks taken on by loan officers and how they might conflict or
Suggest two potential solutions to the multitasking problem for microlenders. Would the solutions be just as easy to implement in a small organization as in a larger organization?
Describe the advantages and disadvantages of microlenders that are privately owned relative to cooperatives.
What is yardstick competition? How does it differ from more general uses of competition? Illustrate your answer for the particular case of microlenders.
Describe as many situations as you can in which there is a principal and an agent in the context of microlenders? How do the examples relate to one another? Do the proposed solutions to any one of
Consider a teacher who has to divide her time between at least two activities: teaching and mentoring her students. The quality of her students depends on the number of hours that she spends with
Suppose the same problem as in the previous exercise, but assume in this case that the teacher must divide her time between three activities:teaching preparation, mentoring, and lecturing. Assume
Suppose that the utility function of a microlender is u = u1 + u2 where u1 and u2 are, respectively, the utility derived from good financial statements and for poverty alleviation. The microlender
Consider two financial institutions. Each institution employs two loan officers (henceforth: agents), and both institutions have the same objectives: financial self-sustainability and poverty
Consider a model with competitive and risk-neutral principals and a risk-neutral agent. The agent may be of two possible types (abilities)Compute the posterior belief held by the market on the
Consider the same scenario as in exercise 10. But in this case,Data from in Exercise 10 Consider a model with competitive and risk-neutral principals and a risk-neutral agent. The agent may be of
Again, consider a similar problem to the one spelled out in exercise 11, but in this case the agent’s effort in each period is observable.His ability remains unknown, however, for both the market
From table 5.1, what do you see as the main differences between individual lending contracts in microfinance relative to their group lending counterparts? What kinds of additional information would
Provide at least two reasons why a “group-lending strategy” may be better than a bilateral (“individual-lending”) strategy and at least two reasons why it may be worse.
Spell out three differences between contracts that are offered by microfinance institutions and standard contracts offered by commercial banks.
Comment on the following statement: “Competition is generally viewed by economists as a good thing, yet microlenders often disagree—even those who do not aim to make profits.”
Use table 5.4 to comment on the merits of the following statement:“Microlenders that extend individual loans generally request some kind of collateral. Such microentrepreneurs are therefore biased
Consider an economy with risk-neutral individuals. There are three types of individuals. An individual of type 1 can invest \($200\) and get a gross return of \($400\) with certainty. An individual
Consider an economy with risk-neutral individuals. And suppose the following timing of events: At date 0, an individual wants to borrow an amount I in order to invest in a project that yields a gross
Assume the following timing of events, and suppose that there are four periods—-0, 1, 2, and 3. At date 0, the bank lends an amount I to the borrower, and she invests the entire proceeds from her
Consider an economy, which is identical to that of exercise 7, except that in this economy there is a moral hazard problem: At date 0, provided the borrower puts in an adequate effort level, she is
Consider the same economy as in exercise 7. But suppose that we now have y = \($380,\) δ = 0.75, and K = \($150.\) Assume that the bank is perfectly competitive, that the borrower is protected by
Consider a situation with three periods. Suppose that at date 0 a risk-neutral borrower obtains a loan I and invests it in a project that yields a gross return I · y at date 1 with probability p.
Consider the same economy as in exercise 9 except that in this case if a borrower defaults at date 1, collateral that is worth w to the borrower will be seized by the bank. Define the R* that will
Consider a borrowing household with disposable income x after purchasing necessities; this amount comes from outside sources, not from the investment that the household is seeking microfinance
Consider the previous question, and suppose that g = $8, x = $22.50, and d = 0.6. Show that the function will still reach its maximum at T = 1.
If given enough time, why can’t households save their way out of credit constraints?
Should facilitating microsaving precede microcredit and not the other way around?
Crop insurance programs have often failed or have cost governments heavily. Spell out the main advantages and disadvantages of instead directly insuring farmers against bad weather. Describe contexts
Women in many poorer regions are less likely than their husbands to hold savings accounts. Suggest three reasons that might explain why women are at present less likely to open savings accounts in
Arguments for subsidizing small loans have long been made. Can you make similar cases for subsidizing microsaving? On grounds of equity? On grounds of enhancing efficiency? Do the arguments you make
Explain briefly two reasons as to why it is nearly impossible for individuals living in rural areas to find effective crop insurance.
Consider an economy populated by two types of risk-neutral borrowers.And suppose that all potential borrowers live throughout four periods: 0, 1, 2, and 3. At the beginning of each period, every
Consider the same problem as in exercise 7, except now both types are impatient. The discount factor for type 1 is now b1 = 0.65 and the discount factor for type 2 is b2 = 0.65. Show that in this
Consider again an economy like the one described in exercise 7, except that in this case all individuals face the risk of a negative shock at the end of period 2. The shock occurs with 50 percent
This exercise shows why microinsurance may work. Empirical evidence suggests that an individual’s degree of “absolute risk aversion,”A, is decreasing, where A is defined as (-u≤/u¢), with u(
Suppose the following timing for a typical household member in a village economy. There are three periods, 0, 1, and 2. In period 0, effort e must be taken. In period 1 there is a storm with 50
Consider an economy similar to that of the previous exercise. Consider a risk-averse individual who faces the risk of losing L with probability 1 - p. The probability of not losing L when she puts in
Suppose that there are two risk-averse individuals with the same utility function u = (w0.7/0.7), where w is wealth. Their initial wealth endowment is w = \($70,\) but their income is subject to two
Consider an economy in which there are two types of risk-averse individuals. Type 1 risks losing \($10\) with 40 percent probability and nothing with 60 percent probability. Type 2 is in a riskier
Discrimination against women occurs for many reasons. Why do you think it has been so persistent over time? And why might microfinance have the power to bring changes?
Provide at least three reasons why microfinance can potentially benefit women.
Provide at least three reasons why, relative to men, women may be better clients, from the standpoint of a microlender simply interested in maximizing profits. What does this say about empowerment?
Consider a household where there are two children, a girl and a boy.Parents in this household derive utility from their children’s educational attainment. Suppose that in order to have their
Suppose the same problem as in the previous exercise, except that the household in this case involves five children, three girls and two boys. Consider the household’s utility to be as follows. If
Consider a household similar to that of exercise 5, except this household’s utility takes the following form:where wm, ww are, respectively, the man’s income and the woman’s income; w = wm +
Consider exercise 6, and compute the threshold rate ww/wm, below which the woman’s preferences have no bearing on the decision that the household will ultimately take.Data from in Exercise
Consider a man and a woman who request a loan of size I from a bank. If the loan is obtained by either individual, it can be invested in either of the following two projects. If invested in project
Consider exercise 8, except that in this case, the utility function of the man is now um = (x0.8/0.8) and that project 2 yields a gross return of $1,120 with 50 percent probability and zero
Some policymakers have argued that impact studies are not necessary.Instead, they argue, all that is needed is a “market test.” That is, if the microlender is attracting fee-paying customers,
Explain at least three different reasons as to why there might be selection biases when trying to measure the causal impact of microfinance.
Consider an individual that has the following utility function: (i) If her income y £ 1,500 taka, then u = l (24 - l ) where l is working time per day, and (24 - l) is leisure time, but (ii) if
Consider a household with three individuals: a wife, a husband, and a child. The household has the following utility function: u = w1x + w2(8 - x) where x is the child’s study time, and 8 - x is
Consider the same setup as that in exercise 4, and compute the optimal labor decision by the household under the following scenarios: 1. when the woman’s opportunity cost increases by 10 percent,
Consider two villages. Village 1 has ten households, all of which have access to a microfinance program. All we know about these households is the following:In addition to having access to a
Consider an economy with two villages populated by two types of risk-neutral individuals. A type 1 individual can invest \($100\) and obtain \($200\) with certainty. A type 2 individual can invest
Consider a bank extending similar loans to people in two identical villages, each comprised of 100 households. All households in both villages are identical, and each loan is worth \($100.\) With a
Consider a village where all households are eligible for a loan from a microfinance enterprise. Suppose that half of those households borrow from a microfinance enterprise, and that half of them do
Some experts claim that subsidies are sometimes needed for formal banking activities to take off. If businesses expect to eventually earn profits over the long term, how can subsidies be justified?
Briefly explain the value of cost-benefit analyses in the context of microfinance. Why may they, at the same time, not be fully persuasive in arguments about the value of subsidies?
Consider a risk-neutral bank that lends a total amount L = \($1,000,000\) to the impoverished. The total cost of lending is C = \($200,000,\) the total subsidy from the government to the bank is S =
Interpret the expression “subsidize the institution, not the customer” and briefly describe this strategy. To what extent does it make sense as a matter of logic? As a guide for action?
What makes a smart subsidy different from subsidies that have long been used to subsidize rural credit in low-income areas?
Consider an economy where 50 percent of the population is poor and 50 percent is rich. The poor have an income, which is a function of the interest rate r: yp = 8,000 ¥ r1/2, and the rich have an
Consider a risk-neutral government-subsidized bank that has an average cost of lending each small loan of $100 to the poor as a function of timewhere t is the year. The maximum interest rate that the
Consider a bank for which the average cost of lending each taka as a function of the size of the loan L is:The bank lends fifty-five loans of 1,600 taka, fifty-five loans of 1,225 taka, 200 loans of
Consider a bank that conducts businesses in three stages. At stage 0, the bank lends to thirty poor clients, lending \($1,000\) per person. In stage 1, each individual borrower repays \($1,200.\) The
Consider a bank that conducts a microlending program in four stages—at dates zero, one, two, and three. 1. At date zero, the bank lends to thirty-five poor clients an amount 6,000 taka per person.
Evaluate the merits of the following statement: Enforcement is a major issue in ROSCAs, yet ROSCAs do not easily fall apart in practice.Explain why.
Consider again the problem described in appendix 3A, and show that the expected utility of a participant member of a ROSCA is increasing with the number of members n, given that n ε N.
Consider a village with n symmetric, risk-neutral borrowers that each live for T periods. At each period, one borrower can earn an amount y, and the level of subsistence consumption is c, where y >
Consider three villagers that live for ten periods and have linear, additive utility functions as follows:where cin is the consumption (both of durable and nondurable) at time i of villager n, and
Compare the main disadvantages of ROSCAs relative to credit cooperatives.If they have these disadvantages, why are ROSCAs so common?
Consider a village inhabited by identical risk-neutral individuals.There are three individuals in this village: a borrower, an inside lender, and an outside lender. The first two are in a credit
Consider an economy with ex ante symmetric, risk-neutral individuals of mass 1, living for two periods with an additive, linear utility function on consumption goods (both durable and nondurable). At
Is the result in exercise 7 still true if we allow the discount rate to be positive? What is the lower bound in this case?
Follow up on your answer to the previous exercise. What is the “upper bound”? Briefly explain your answer.
Evaluate the merits of the following statement: “Relative to standard contracts where collateral is involved, under group-lending contracts banks elicit more information about the borrowers’
Consider an economy with two types of risk-neutral borrowers.Borrowers are protected by limited liability. There are one-period projects that require \($100\) to be carried out. The bank is
Would the type 1 individual be willing to borrow under a joint responsibility clause in this particular case? Briefly explain your answer.
Consider similar economy as in the previous exercise. But in this case there are three types of potential borrowers: Borrower 1 succeeds with probability 90 percent and gets a gross return y1 =
A bank is considering extending loans to a population of four borrowers with identities A, B, C, and D. Borrowers A and B are of type 1, while C and D are of type 2. The bank cannot observe
Consider the following timing. First, at time 0, loans are made. Then in period 1, borrowers’ types are revealed, followed by the realization of returns in period 2. Here, borrowers are identical
Consider again an economy like the one described in exercise 6. But now suppose that at date 1, with the same probability π = 1/3, the borrower can turn out to be type 1, type 2, or type 3. Type 1
Consider the following timing. First a loan is made. Then monitoring choices are made. Next, effort decisions are made and effort is applied. Finally, returns are received. Suppose that the economy
This question assumes the following timing. First a loan is made.Then returns are received. Next, monitoring is undertaken to assess the nature of the returns. Finally a report is made based on the
Microfinance has grown most quickly in low-income countries, but many poorer households in richer countries also lack access to highquality financial services at reasonable prices. Why would
Consider an investor in Hong Kong trying to decide how to allocate her investment portfolio. Why might investing in Kenya or Bolivia seem riskier than investing closer to home? Why might it seem
How does the marginal return to capital help determine the maximum interest rate that a microlender can charge its customers?
Why might the principle of “diminishing returns” to capital not always hold in reality? How can “failures” of the principle explain the existence of poverty traps?

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