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Question 3. Answer the following questions about social insurance. ai Consider one of the social insurance programs we have studied. Present an argument as to why there are incomplete private insurance markets in this case. |What is the likely linsurancei outcome in the absence of government intervention? is] The optimal social insurance problem is a balance between protection and distortion. Discuss each of these in the contest of the unemployment compensation literature. What are we ooncemed about distorting? What are we protecting? What are the key elasticities that we need to measure to determine optimal UI benets? How does each qualitatively affect the optimal Ui benet? Two of the key social insurance benet programs in the US are disability insurance {DI} and social security [55}. Both programs are federal: therefore all persons face the same eligibility and benet structure leg. no variation across states]. Further. benets are a function of prior earnings. d] Discuss the challenges for causal identication of the impact of social insurance [le55} on labor supply given the program characteristics listed above. Suppose we estimate the impact of the social insurance program by regressing labor supply it] on the DI or 55 benefit [El] using cross sectional data {for example. L. = a +1395. \"'3. + c; 1. Discuss the validity of this estimator and the sign of the possible bias for the parameter of interest {y ]. Describe an identication strategy used in the literature on DI or 55 that you think provides the best alternative approach for estimating the impact of B on L Focus your discussion on the identication strategy. 2. Explain the determination of the optimal price and output combina- tion in a situation of monopolistic competition. Use the resulting equilibrium to illustrate the statement that *production inefciency is a necessary price to pay for product vaety'. Comment on this statement. 3. Assess the contribution of business games to the study of decision- making processes, illustrating your answer by reference to one business game with which you are familiar. d. 'Giyen that the future is unknown, the best we can do is to estimate the likelihood of future events and then use expected prot as the decision criterion.\" Discuss. 5. The senior partner in a local accountancy rm is concerned about the error rate amongst assessments issued by her ofce. A careful check over the past few years enables her to estimate that the error rate has the following probability distribution: Error rare Probability 0.05 0. 25 0.10 0. 35 0.15 0. 215 0.20 0. 15 Each error costs 40 because of the labour time touched in reassess ment. Her rm is just entering the assessment 'season*, and is expected to perform 500 assessments over the next few months. l[Zine way to reduce the error rate is to send all staff to a one-day training course at the local university 'Precision in Assessment. The university claims this would ensure an error rate of 0.05, but she considers that an error rate of 0.10 would be equally likely. The course fee is 700 for all her staff, whilst lost prot from one day's work missed would be 500. Advise her on whether to send staff on the course or not. \f_--.-.._...-_-...._-.. 11-...- u- 1\" -r-n--- -u- I'_J' u--_. 9. (a) Briey analyse the effect of an increase in interest rates on the 1!). investment portfolio of a prot maximising holding company. (b) The University is contemplating building a new squash court, adjacent to its new hall of residence. To secure local support for its planning application, the University has offered to open the court to local players at student rates for the rst ve years. After ve years, the University can charge what it likes for the courts. lUsunsequently, the University estimates that net revenue from the court will be li'lilI for each of the rst ve years, rising by 111% (compounded) in each of the sixth to tenth years. In the eleventh and twelfth years rising maintenance costs 1will com- pletely offset rising fees so that net revenue stays at tenth year level. At the end of the twelfth year, the site is due for redevelopment. The cost of building the squash court is estimated to be 6001}. To nance the court, the University must draw from its re- serves, eurrently earning 12% in Local Authority Bonds. Selling sufcient bonds would involve legal and administrative costs of 32. Advise the University on the viability of the project. What other factors should the University take into account?I A rm has an annual demand of .5' units for a good whose purchase cost is 1: per unit. Each order costs t to place, and the cost. of holding stock is 11% of the average value of stock per annurn. Determine the optimal order quantity. A local rm uses Zillill] units of a particular component each year. The component has a purchase price of 4funit, while the cost of holding stock is estimated at 213% of the average stock value. If the cost of placing each order is 12.51], nd the optimal number of orders placed each year. Suppose the component supplier offers a discount of 2% on the purchase price if orders are placed in units of 1WD. Is the discount worth accepting? Suppose that instead of a single gure you had been given a probability distribution for the number of units used each year. Indicate the effect on stock onliev