Macroeconomics and Economic Comprehension - Essay Example

? Macro and Micro Economics Economic comprehension Ann is better off than Peter” or “Peter needs medication more than Ann does”. Express these comparative statements in terms of Ann’s and Peter’s utility functions, and explain Utility function is defined as; the ratio of pleasure to pain an individual endures. The comparison is carried out between these two factors. In the ratio of Ann’s to peter’s case, Ann has a lower utility function than peter because peter is on medication. The amounts that peter will spend on medication makes him more vulnerable in spending. Though, this is just a rough estimation. The utility comparison has never been accurately summarized, each writer puts down their own views. All the views are somehow correct because they are an improved notion of the first theory. So it is correct to say, Ann’s utility function is lower than peter’s. 2. Central banks have started raising interest rates as many economies picked up in 2010, to combat inflation. Explain the (opposite) effects of higher interest rates and lower inflation on the budget set and welfare of house owners with a mortgage, and assess the overall effect on them. Interest rate is the amount which is charged to the borrower by the lender and it is usually expressed as a percentage. The rate changes due to inflation. On the other hand, inflation is the general rise in the prices level of services and goods over duration of time. By increasing the interest rates, the central banks make it harder for the commercial banks to borrow money. By so doing the money in circulating reduces hence reducing the inflation. The inverse of this is the central bank reducing its lending rates and making it possible for more banks to borrow money. This will translate to people borrow more money thus increased purchasing power. To people with mortgages it will be easier for them pay to the bank. The overall effect is that the living standards of people will improve since there enough money and its value will be okay. 3- Economics Comprehension 1 Insurance is big business in the UK. So is internet gambling? How might we explain this paradox? (Can it be explained without giving up the assumption that people’s preferences obey the von Neumann-Morgenstern axioms?) Insurance is a contract where premium is paid to the insurer to cover the occurrence a specific risk. Internet gambling includes any kind of activities that are transacted through the internet which involve placing of bets or a wager. The Von- Neumann-Morgenstern’s theory of utility has many assumption is one of them being continuity. This is shown by a decision maker who prefers an outcome A to other outcomes B, C. in the interval of unit a number p makes the decision maker indifferent between getting outcome B and yielding A which has a probability P, probability 1-p for C in a lottery. In the UK, insurance being a big business attracts a lot of people. 4. In modern societies, not just simple goods but also uncertain prospects (such as insurance policies) are traded, sold and bought. Show how this phenomenon can be explained by differences in risk attitude between economic agents and show how Pareto-improvements can thereby be achieved. In the modern world, different methods have been established due to high rise of risks. Insurance also involves risks making its agents involve a fee charging the users of the service involving on the risks insured. An agreement between the inured and the insurer known as the policy holder determines the claims which the insurer is legally required to pay. Risk management is important in insurance since insurance companies take over risks from customers. Risk attitude affects projects. This is because of differences in people’s attitude to risk cause conflict, and delay. This can lead to poor management of risks. Loss in insurance is depending on two variables: the number of losses that will occur in a specified period and the amount of losses given that a loss has occurred. The risk attitude depends on its types and amount that will be paid by the insured. This means that premiums paid should be worth the risk insured. Economic agents are different from risk attitude since risk attitude is the view on inured and economic agents affects both the insurer and insured. Pareto- improvements are needed to maintain the insurance policies such that the premium balances regardless of economic times. 5. Many stores make some form of “Price Match” promise to their customers. How might game theory help us to understand why they do this? Responses of consumers differ with issues to do with scope and refund depth. Shore loyalty is positively affected by the refund scope, with the effects being felt by the skeptical consumers and also the price conscious ones while the consumer behavior was not affected by the refund depth. Refund depth effects are more explored through the use of case scenarios which are based on manipulation but depth effects don’t really affect store loyalty. For store loyalty to be stimulated retailers are mostly advised to give price-matching rules which are widely scoped. Since there is a lacking on the effects in store loyalty, refund depth should be kept restricted by the retailers so as to match the prices that are relatively low and thus competitive. For this reason the retailers would be allowed to lower their costs by which they offer the policy without ever affecting the policy of store loyalty. 6- The number of points (q) expected in a single season for a Premier League football team depends on the amounts it spends (in wages) on goalkeepers, defenders, midfielders and strikers respectively, i.e. q = f(G, D, M and S). What are the likely properties of the “production function”, f? Devise a plausible formula for the production function. It is practically proven that the more a business spends in output is directly proportional to the output generated. The same applies to a football team, the more the manager spends on the players. In order for the players to give their maximum output they have to be motivated. The order of motivation also matters, the money spent on goalkeepers and strikers shouldn’t be the same with the defenders and midfielders. The ratio of spending on goalkeepers and strikers to that of midfielders and defenders should be 4:3 respectively. The reason for this varying spending is due to the availability of the product in the market, the possibility of getting a defender is higher than getting a good goal keeper. The ability of the current goal keeper to give a maximum production depends on how well he is being handled and hence he prefers remaining in that team, the same applies to the strikers. G&S: M&D 4 : 3 Q=f(4*1/3) Q=4/3f 7- Explain how the first fundamental theorem of welfare economics gives support to the idea of invisible hand acting in a market economy. Assess how “good” this invisible hand is in terms of the results (allocations) it brings about? Economics welfare first theorem of fundamentals states that, “for any equilibrium to be Pareto efficient then it must be an equilibrium that is competitive. A case example to this would be p=(.5,.5), r2=(0,10), r1=(10,0), u1(x, y), t= (2, 2). This shows that it is an endowment since the equilibrium which is allocated in this example is with excise taxation. It can also be a corner solution hence the marginal rates are not perfectly defined or the ratio on price equal to the substitution. The theorem is sometimes misunderstood by people especially those in the field of technical economy. This theorem has proven that it requires assumptions that are strong such as huge number of sellers and buyers who have perfect information and also rationality. These conditions most likely cannot hold in the world today needed for the proof of the theorem it is not common for them to be reversed by people to make it be suggested that the efficiency of markets cannot happen. 8. our world looks awfully Pareto inefficient. Provide a real-world example. Which assumption(s) of the first fundamental theorem of welfare economics are violated in your example? Pareto inefficiency is the concepts used in economics with the application of both social sciences and engineering. It was named after an Italian who was an economist by the name Vilfredo Pareto who used it when he was studying income distribution and economic efficiency. A case example to this would be a CEO who has just discovered that two or one of his workers produces waste is very negligent. By this through the common sense the CEO tends to fire him or her so as to hire more productive workers. In this we see that the decision may be Pareto inefficient which makes the worker worse off. Under this principal of Pareto inefficiency people are usually not accepted to take up decisions that are compromising to people who don’t do good work for them. Thus by this Pareto contradicts to the principal of maximum productivity. Thus the assumption violated is that no participants should be considered worse off. 9. Suppose that a university campus has been built with many food outlets. Would the university let the outlets to many firms, or to one? Describe the likely size and distribution of surplus under each arrangement. There is a high likelihood that the university will let the food outlets to many firms because this will increase the diversity of the products that will be offered. This will also increase the competition between the firms leading them to improve their services and products unlike if it was a single firm which will be a monopoly and will face no competition. To the students, many eating outlets will offer a variety of food. For a single firm the surplus will be less since the firm will be budgeting for the whole campus as a whole, putting into account all the outlets and assuming there are three outlets. For many firms, the surplus will be high since each firm will be budgeting for the campus as a whole and they will be equipping a single outlet with everything. To the university, it will be in a good position to negotiate the letting price. 10. It has sometimes been said that commercial television led to a “dumping down” of the BBC. Why would this have happened? (Relate your answer to the Hotelling model). What, then, should be the effect of multichannel technologies on the availability of “high-brow” This is due to the commercial pressures exerted on BBC. Its future is examined in the context of the debates that are currently underway. The constrains on the European community are described by them and also the need to have a clear definition to have such a broadcasting sighting that the are not included in the laws of the United Kingdom. The British Broadcasting co-operation is also under a lot of pressure from the rules of fair trading which are got from the laws of competition. Some of these laws may weaken the co-operations output in delivering its missions of public service. Suggestions from research taken indicate that internal and external pressures have belittled the conditions for there to be a distinctive service output. What remains is the basis for such outputs that are within the program-makings culture. What is discussed finally is the regulatory and legal implications on the cultural and social purposes of the co-operation and how they should not be subordinate to the concerns that are completion based. Bibliography Grether, D. (1979). Economic Theory of Choice and the Preference Reversal Phenomenon . Manhattan: Manhattan publishers. Lichtenstein, S. (1971). Decisions. New York: McGraw publishers. Read More