Econ

Consider the following scenario. Suppose that a subsistence farmer has planted crops with a potential market value of $490 (= wo). The probability of locusts damaging the crop resulting in a loss (L) of $400 is 10 percent. Suppose that this farmer’s utility function is given by U(w) = w0.5.

Part I: Decision-making under risk 35 points total)

Circle T if you agree with a given statement; circle F if you disagree with it. Each question is worth 5 points each.

T F 1. In the scenario given above, the expected value of y is equal to $4,500.00.

T F 2. In the scenario given above, the individual is risk averse. This is evident because the farmer is willing to pay at least the actuarially fair premium of $400 for crop insurance.

T F 3. In the scenario given above, the expected utility of wealth is exactly equal to 66 utils.

T F 4. Many low-income countries lack the necessary financial institutions to help individuals and firms manage risk which has a negative effect on economic growth.

T F 5. In the scenario given above, the risk premium is exactly equal to $144 which is the maximum amount that this individual is willing to pay for insurance with full coverage.

T F 6. According to the evidence reported in the article on commitment savings devices, women with hyperbolic time preferences benefit from commitment savings devices but men do not.

T F 7. In the article on the demand for HIV status, Professor Thornton finds that distance has no effect on a person’s probability of obtaining their test results.

Part 2: Regression exercise (45 points total)

1. Use the data for the states of India in the workbook labeled “exam 2 data set” and the regression tool in Excel to estimate the following model:

Infant mortality rates = β0 + β1(female literacy rate)s + us,

where s is the state of India and u is a random error term. Provide a copy of the Excel output from estimating this regression. (15 points)

2. Use the regression output to test the following null hypothesis: “female literacy has no effect on infant mortality.” Explain your answer. (15 points)

3. Briefly explain the policy implications of your finding. (15 points)

Part 3: Why is the middle-east economically under developed?

How does Timur Khan explain the greater prevalent of corruption in middle-eastern countries relative to West European countries? Explain. (20 points)

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