Question

1. Describe one mechanism households can use to smooth income. Why can income smoothing be costly to households?

2. What kind of asymmetric information is addressed by joint liability in microfinance, and how does it work?

Answer 1

Ques 1

- Households can smooth income, this can be regularly accomplished by settling on moderate creation or work decisions and broadening financial exercises.

- Along these lines, households find a way to shield themselves from unfavorable income stuns before they happen

- Since households pick more secure creation procedures, they might have the option to restrain introduction just to income stuns that can be dealt with the methods accessible.

- The risk of smoothening income will be that households will not take the risk that may fetch them irregular but higher income and in the long run they may miss out on many opportunites.

- Those income smoothening systems could then show up to perform without limitation, yet we can't state that if households embraced new, more dangerous chances, they would be also ensured.

- Gaps may remain in the viable market structure, but since households make a special effort to evade them, we are substantially less prone to see households in a tough situation