Discuss the approaches adopted by Pigou and Pareto for analyzing the problem of welfare economics.
Pigou in the book " The Economics of Welfare" (1932) coined the concept of social indicators (economic) well-being. He introduced the quality of life indicators - environmental conditions, recreation, access to education, public order, health care and more. He believed that the optimum well-being is possible only if state interventions in the process of resources usage and income distribution and emphasized that economic prosperity is is not interchangeable with the general welfare, as it doesn’t contain such elements as environment, the relationship between people, housing, public order.
Pigou devoted considerable
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Explain Arrow’s Impossibility Theorem
Consider the pay-off matrix of a game given below:
Sita expects her future earnings to be worth Rs. 100. If she falls ill, her expected future
earning will be Rs 25. There is a belief that she may fall ill with probability of
while
the probability of remaining in good health is
Let her utility function be given as U(y) =
suppose that an insurance company offers to fully insure sita against loss of earnings
caused by illness against an actuarially fair premium.
(a) Will Sita accepts the insurance. Explain.
(b) What is the maximum amount that Sita would pay for the insurance?
What is indirect utility function? How will you derive an indirect utility function from a direct utility function? Explain Roy’s identity?
Actuarially Fair Premium
. Consider the pay-off matrix of a game given below:
|
Player1 | Player 2 | ||
|
| I | O | |
| A | 1,1 | 3,3 | |
| N | 2,4 | 4,2 | |
(a) Find all the Nash equilibrium of this game. Which player(s), if any, would have a dominant strategy?
(b) Suppose that player 1 moves first by choosing either A or N. Players 2 observe player 1’s action and then choose I or, O. For every action combination, the
player’s pay-offs are the same as in the above pay-off matrix. Draw a tree of this new game. How many strategies does player 1 have and what are they? Find all the sub-game perfect equilibria of this game.
Write short notes on any two of the following:
(a) Envelope theorem
(b) Hidden information
(c) Actuarially Fair Premium