Question

State whether statement is TRUE/ FALSE and briefly Justify reason for it
1. Two countries with the same Gini coefficient have the same Lorenz curve.

2. Limited access to insurance is often a constraint faced by smallholder farmers that hinders agricultural productivity.

3. When applied to real-world data, the Solow model does pretty well in explaining how amounts of capital and labor can impact aggregate production.

4. The Total Poverty Gap is the total income needed to eliminate poverty, normalized by the total income in society.

5. Moral hazard is important in credit markets, but not in insurance markets.

6. By increasing the interest rate, it is possible that a lender facing adverse selection may reduce her own expected profit.

Answer 1

1. False

Two countries with the same Gini coefficient may not have the possibility of same Lorenz curve.

Gini coefficient or Gini index measures inequality in a population. It is based on dispersion of income and distribution of wealth in a country. The values ranges from 0 to 1. Two country may have same Gini coefficient but may not have income distribution.2. True

Limited access to insurance is often a constraint faced by smallholder farmers that hinders agricultural productivity.

Small and marginal farmers are not getting much support in the forms of insurance and credit facilities. Farming is a situation of gambling with nature. Without proper formal credit and insurance facility, the farmers are not able to maximise their productivity.3. True

When applied to real-world data, the Solow model does pretty well in explaining how amounts of capital and labor can impact aggregate production.

Solow growth model is an exogenous model that examines the change in level of output in the economy as a result of savings rate, technical progress and changes in population. The Solows model assumes constant returns to scale.4. True

The Total Poverty Gap is the total income needed to eliminate poverty, normalized by the total income in society.

The total poverty gap shows the minimum level of income required to attain basic necessities of life. It also reflects the magnitude of poverty in a nation

.5. False

Moral hazard is usually related to insurance industry. Moral hazard is a situation in which one individual gets involved in a risky situation knowing that he or she is protected aganist risk in the form of insurance. It is one of the problem of asymmetric information where one party lacks complete information. Moral hazard problem is very common in insurance industry.

6. True

By increasing the interest rate, it is possible that a lender facing adverse selection may reduce her own expected profit. The increase in interest rate reduces the returns because opportunity cost is so high and the expected profit will be marginal