Economics, Accounting & Business: Post your doubts here!

[student92]

Please explain moral hazard and adverse selection with reference to market failure.

adverse selection
An insurance company faces an asymmetric information problem of its own:
the people buying insurance know more than the company about the risks
they face.
Consider car insurance. Who needs it more: good drivers who hardly ever get
into accidents, or bad drivers who get into lots of accidents? Now, clearly,
even good drivers want insurance because they’re sometimes involved in accidents
for which they’re not to blame. But bad drivers want insurance even
more to help pay for all the accidents they know they’re going to cause
because of their poor driving. Economists call this problem adverse selection.
An asymmetric information problem faces the insurance companies because
although individual drivers know whether they’re good or bad, the insurance
companies can’t easily tell them apart. If they were able to tell them apart,
insurance companies would simply charge the good drivers a low rate for
insurance and the bad drivers a high rate.
But because they can’t tell the good and bad drivers apart, the insurance
companies run a serious risk of going bankrupt. To see why, imagine that
insurance companies offered the same low rate to everyone, as though they
were all good drivers. This strategy soon leads to bankruptcy because the
insurance companies aren’t collecting enough in premiums to pay off all the
damage caused by the bad drivers.
To avoid bankruptcy, the insurance companies may go to the other extreme,
charging everyone as though they were bad drivers. But then the good drivers
stop buying insurance because for them it’s overpriced. The result is that
only bad drivers sign up for insurance.
This result is very poor for society because you want everyone to be able
to buy insurance at a rate that fairly reflects his or her driving ability. Good
drivers should be able to get insurance at a fair rate. And because good drivers
make up most of the drivers in the real world, insurance companies lose
out on lots of potential profits, unless they can figure out a way to separate
the good drivers from the bad drivers.
moral hazard.
The other big problem facing insurance companies is called moral hazard.
Moral hazard arises because buying insurance tends to change people’s
behaviour. For example, if you don’t have car insurance, you’re likely to drive
much more slowly, knowing that you have to use your own money to pay for
any damage you cause. But because you do have insurance, you may drive
faster and more recklessly knowing that if something goes wrong, the insurance
company is going to be stuck with the bill. Similarly, because you have
contents insurance, you may be more prone to leaving your door unlocked.

hope this helps, it made my concept clear, but i still dont know how to link it to market failure, i mean there is no solution to this, with government intervention, it cant still be avoided unlike with externalities and merit goods and public goods

 

[Esme]

yea thanks. this makes it quite clear.

 

[mrgreedywolf]

Economics 9708 paper 12 oct/nov year 11

question 1

An individual has an appointment with his bank manager.
He has a choice between travelling to the appointment by car, or leaving the car at home and
travelling by bus and then by train. The costs of the journey are given below.
$
bus fare 2
train fare 3
car parking charge 4
petrol 2
car wear and tear costs 1

Given this information, what is the opportunity cost to the individual of travelling by car rather than
by bus and train?
A $2 B $4 C $7 D $12

Please provide a solution with explanation.

 

[burningfire]

Economics 9708 paper 12 oct/nov year 11

question 1

An individual has an appointment with his bank manager.
He has a choice between travelling to the appointment by car, or leaving the car at home and
travelling by bus and then by train. The costs of the journey are given below.
$
bus fare 2
train fare 3
car parking charge 4
petrol 2
car wear and tear costs 1

Given this information, what is the opportunity cost to the individual of travelling by car rather than
by bus and train?
A $2 B $4 C $7 D $12

Please provide a solution with explanation.

Well, this is how I'd do it,
Cost of travelling by car = ( car parking charge+petrol+car wear and tear cost) = 4+2+1= $7
Cost of travelling by train then by bus = ( Bus fare+train fee) = 2+3= $5
opportunity cost of travelling by car rather than by bus and train = (cost of travelling by car - cost of travelling by train then by bus) = 7-5 = $2
therefore, A is the correct answer
Hope this helped and good luck with your exams =]

 

[Paradoxical]

Economics 9708 paper 12 oct/nov year 11

question 1

An individual has an appointment with his bank manager.
He has a choice between travelling to the appointment by car, or leaving the car at home and
travelling by bus and then by train. The costs of the journey are given below.
$
bus fare 2
train fare 3
car parking charge 4
petrol 2
car wear and tear costs 1

Given this information, what is the opportunity cost to the individual of travelling by car rather than
by bus and train?
A $2 B $4 C $7 D $12

Please provide a solution with explanation.

I'm not sure but this is my answer:

It's A. This is because the total cost of travelling by car is $7 and the total cost of travelling by bus and train is $5. So if he was to travel by car he would have an extra cost of $2 (7-5).

Again, I'm not completely sure, so if anyone thinks I'm wrong please correct me.

 

[mrgreedywolf]

as salam alikum
http://www.xtremepapers.com/CIE/International A And AS Level/9708 - Economics/9708_s11_qp_11.pdf
as economics p1
q 19 21 27 30
http://www.xtremepapers.com/papers/CIE/Cambridge International A and AS Level/Economics (9708)/9708_s11_er.pdf
marking scheme
thankyou

for q 19

option A
.........................food : Cloth
country X............. 3 : 1
country Y............. 2 : 1

option B
.......................food : Cloth
country X..........1 : 1
country y.......... 1 : 1

option C
.......................food : Cloth
country X...........2 : 1
country y.......... 1 : 1

Option D
......................... food : Cloth
country X ...........0.5 : 1
country Y ..............1 : 1

(edit : all my formatting went down the dam drain.)


since the required trade ratio is 1.5 food for 1 cloth option C will be best because (2 + 1)/2 = 1.5 (food) and (1+1)/2 = 1 (cloths)

generally anything in between the two ratios will be tradable like 0.75 of food etc.
the rest of ratios don't exactly match the required trade.


For q21

term of trade = index of export prices / index of import price

let us assume both are at 100

now since there was a 20 % increase in export prices we may assume the new export prices be 100 +20 = 120
we have the current term of trade which is 15o , so lets place it in the formula

=> 120/x *100= 150
=> 120/150 * 100= x
=> 80 = x

so the new import index is 80, since we assumed the original to be 100 we will simply find out the difference which is (80-100) = -20
so the answer is b


for mcq 27

I think it is mostly related to term of trade , of which i dont have a complete knowledge of so i cant help you in this one.

for mcq 30

since uk's interest rates are falling people woild no longer be interested in investing in uk therefore there would be less demand for pounds,
this would shift the demand curve of pound to the left.
Because usa interest rates are going up, people would prefer to invest in usa (this would also include people within uk) therefore people in uk would sell there pounds to get us dollars so they may invest in usa. Therefore the supply of pounds will be increased and thus shifting to the right .

These shifts would get us to point C.

Hope this helped.

 

[burningfire]

Which is a normative economic statement?
A Money is the least liquid form of wealth.
B Some firms are subsidised by the government.
C Some workers earn more than others.
D Taxes are the best way to discourage smoking.
why isint a also a normative statment
correct answer is d

I would certainly choose D on first blink, as these are social-sciences and there is no "Best" way" for anything, so as D mentions " Taxes are the BEST way to discourage smoking." I'd say that this is an opinion of someone as he thinks that the "best" way to discourage smoking are Taxes.
I know little words make big difference, that's why always read the choices carefully, and focus on these little words
Hope this helps =]

 

[student92]

mrgreedywolf and burningfire

thanks alot

 

[student92]

http://www.xtremepapers.com/CIE/International A And AS Level/9708 - Economics/9708_w10_qp_13.pdf
q 23
as economics p1 on2010

correct answer is c
thankyou

 

[Esme]

can sumone please provide me with notes on deflation as soon as possible !! please!!!

 

[00mfr]

ASA
in accounting paper 2, when we have to find credit sales for income and expenditure account, in some papers they add the discount allowed to sales and put in expenses while in some papers it just appears in expenses
what is the right way ??

 

[Esme]

can plz post link to the ppr. it would be easier to answer your query.
also i havent come across any such difference yet.

 

[00mfr]

can plz post link to the ppr. it would be easier to answer your query.
also i havent come across any such difference yet.

in w11 paper 2 - question 1
discount allowed has been added to sales and in expenses
in s08 paper 2 - question 1
discount allowed only added to expenses
answer appreciated

 

[Paradoxical]

can sumone please provide me with notes on deflation as soon as possible !! please!!!

Tutor2u has really good notes for economics.
http://tutor2u.net/economics/revision-notes/a2-macro-deflation.html

 

[Paradoxical]

Guys, how long should we be spending on each section in paper 2? I'm having a little trouble with time management.

 

[Esme]

economics- half hour section A, one hour section B. in section B -> 25 mins on (a) n 35 mins on (b).
accounts- half hour on each of the three questions.

this is how i manage my time. but its still really hectic !!

 

[Paradoxical]

For the question 'Discuss how a rapid rate of inflation might affect different groups within an economy' (Paper 2 May/June 2007 Q3b) there's a part in the mark scheme that says 'understanding of the importance of relative rate of inflation.' I don't quite understand this. Are we supposed to mention something about real and nominal income?

 

[Esme]

no i think this means how the consequences will differ with different types of rates:
stable vs accelerating
low vs high
anticipated vs unanticipated
the rate compared with other countries

 

[Esme]

wat does lack of confidence in an economy mean ??
wat does it result in ?
how is it caused ?

 

[redapple20]

Wat r adjusting and non adjusting events?