Question

1) Say that in year 1 both K and L have values of 1 while in year 10 K has a value of 1.35 and L has a value of 1.1. What is the annual rate of change for k (note the lower case, its not K)?

2)

China currently faces what demographic issue?

a	rising emigration

b	a falling dependency ratio

c	falling emigration

d rising dependency ratio 3) If lenders cannot distinguish between good and poor credit risks economic theory predicts that a good and poor risks will pay the same interest rate on their loans b all borrowers will find a loan in the credit market c bad risks drive out good risks in the credit market

4)

Over the last four decades the Lorenz Curve in the U.S. has

a	shifted up

b	moved away from the 45 degree line

c	shifted down

d	moved toward the 45 degree line

5)

The holdup problem illustrates

a. why vertical integration is a poor idea

b. why adverse selection matters

c. why asymmetric information matters

d. the importance of enforceable contracts

Answer 1

Answer.

10. Using principal as 1 time as 10 year and rate as r

Solving our equation:
r = (1/10)((1.35/1) - 1) = 0.035
r = 0.035

Converting r decimal to R a percentage
R = 0.035 * 100 = 3.5%/year

The interest rate required to get a total amount, principal plus interest, of $1.35 from simple interest on a principal of $1.00 over 10 years is 3.5% per year.

Therfore, R = 3.5%/year

Equation:
r = (1/t)(A/P - 1.

2). answer (d) as the phenomenal pace of China’s ageing has put great pressure on its socio-economic development. China is facing enormous challenges in establishing a nationwide pension or superannuation system that will provide adequate financial support for its rapidly growing elderly population. There are also great challenges in consolidating, and further improving, China’s now nationwide health care system.

Yet, whether this, and other development strategies, will be sufficient to cope with the great socio-demographic changes brought about by China’s rapid urbanisation, ageing population and persistently low fertility rate.

3). If lenders cannot distinguish between good and poor credit risks, then economic theory predicts that bad risks drive out good risks in the credit market.

Because of adverse selection, insurers find that high-risk people are more willing to take out and pay greater premiums for policies. If the company charges an average price but only high-risk consumers buy, the company takes a financial loss by paying out more benefits or claims. However, by increasing premiums for high-risk policyholders, the company has more money with which to pay those benefits. For example, a life insurance company charges higher premiums for race car drivers. A car insurance company charges more for customers living in high crime areas. A health insurance company charges higher premiums for customers who smoke. In contrast, customers who do not engage in risky behaviors are less likely to pay for insurance due to increasing policy costs.

4). Over the last four decades the Lorenz Curve in the U.S. has shifted towards 45 degree line.

If every household in the United States received the same income, the Lorenz curve would coincide with the 45-degree line drawn

Income inequality in the United States has soared in the last half century. The gap between the average annual incomes of high school graduates and those with a bachelor’s degree increased substantially over the last half century. Income distribution data can be presented graphically using a Lorenz curve, a curve that shows cumulative shares of income received by individuals or groups.

5).The holdup problem illustrates the importance of enforceable contracts.

The hold-up problem is a situation where two parties may be able to work most efficiently by cooperating but refrain from doing so because of concerns that they may give the other party increased bargaining power, and thereby reduce their own profits. When party A has made a prior commitment to a relationship with party B, the latter can 'hold up' the former for the value of that commitment. The hold-up problem leads to severe economic cost and might also lead to underinvestment.