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2. Currently, Krona has currently no compensation scheme for workers infected with the disease and you are advising the government on the introduction of such a scheme (suppose for this exercise that there are no other unemployment or sick benefits and this would most likely concern any future disease). Model the economy with identical individuals who earn a wage of 500 while working and 0 when sick with the disease. With probability q, the individuals get sick with the disease and cannot work. When sick, individuals would receive a sickness compensation s from the government. To finance the scheme, when working individuals pay lax of (500*t) where t is the tax rate. u(c) = c1/$ denotes the individuals utility from consumption of c in any given state. a) Write down the individual's expected utility as function of s, q and t. [3 marks] b) What is the government's budget constraint for an actuarially fair compensation scheme; write down what is balanced government budget in terms of s, q and t. [2 marks] c) Find the value of compensation s that maximizes individuals expected utility, assuming a balanced budget. [6 marks] d) What is the tax rate t required to finance the compensation maintaining a balanced budget? Discuss very briefly the intuition (2 sentences). [4 marks] e) Discuss briefly the merits of the introduction of such a disease specific compensation scheme, including a brief discussion of moral hazard. [5 marks]4. (a) Division- AY of STATUSLINE Ltd. is a profit centre which produces four products M, N, O and P, Each product is sold in the external market also. Data for the products are: Particulars M N O P Market price per unit (() 300 292 280 260 Variable production cost per unit ({) 260 200 180 170 Labour hours required per unit (hrs.) 2 3 Product P can be transferred to Division-BZ, but the maximum quantity that may be required for transfer is 2,500 units of P. The maximum sales in the external market are: M-2800 Units; N-2500 Units; O-2300 Units; and P-1600 Units. Division-BZ can purchase the same product at a price of