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Macro and micro economics - Essay Example

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Macro and Micro Economics Name Institution Economic comprehension 1- 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…
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Download file to see previous pages 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 ...Download file to see next pages Read More
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