Question

Prove any three of the following:

(a) Credit-rationing is inefficient.

(b) In the Harris-Todaro model of migration, the wage in the informal sector is lower than the wage in the agricultural sector.

(c) Under imperfect information in the land market, the high quality tenant makes more than the low quality tenant.

(d) The share-cropping contract is better than the rent contract in the bad state.

(e) Prove that interlinkage is efficient.

Answer 1

C. Under imperfect information high quality tenant will charge premium prices taking cognisance of fact that buyer doesn't have symmetrical information on commensurate standard rates for the property and hence will be well off as compared to low quality tenant who will offer discounts to crent the property faster.

A. Credit rationing prohibits lenders to provide additional funds to borrowers despite reluctance of borrowers to provide high interest rates against funds. This becokes inefficient as neither borrower benefits from additional liquidity nor the kender benefits from higher interest receivables and ultimately lower liquidity propels lower consumption and demand and thus lower GDP, hence is inefficient.

E. Interlinkage is relationships and collaboration between different sectors and industry for example Smartphone industry collaboration with Telecommunications industry. If Nokia collaborate with Verizon such that Nokia smartphone customers get free Verizon data packs it brings strong customer base for both players and facilitates higher customer market share. Thus it creates efficiency like lower costs and higher revenues.