Question

6. Short questions (10 points) a. Describe the first and second Welfare Theorem (2 points). b. Describe the difference between risk aversion, risk neutrality and risk prefering (2 points). c. Describe and explain the non-satiation assumption (2 points). d. Describe and explain the difference between adverse selection and moral hazard (2 points). e. Describe and explain the difference between income effect and substitution effect (2 points).

Answer 1

pribe 2 . emplognent less the finst & Second Welfare Theorom. Finst theorem : ? A market will send toucard a competitive market equilibrium, that is leakly barreto-obticmal, lishers the market maintains the following a attributes. A coomblele markets with Imo tramsaction costo on Price - taking behaviar Second Theorem . That out of all possible pareto optimal outcocones, one can achieu N a my particular ame be enactio a leecob Suc evealth 98-distribution & then letting the market take overo b) Risk-aversio := A risk-avose forvestor comeans who would like to take low riske with high reuros. Risk neutral : = lisho are insensitive to risk. Kisk preferring & A risk lover persoor ewants to take risk, as they are more attracted to rele erau The assumption of man-Satiation coreams, lul are not satisfied with our wants. core is better C) mom-Satiation

I odense seleetion us ancial hazard tushen the buyers 6 Selles have diffon ionjarmatic about Socou aspect of the product quality Moral hazard Oua uhoot om individual has an incentive to c reare the exposure to susk beraube they do ont bear the full costs of that risk e) anecone effect - Substilation effat foncocone effiat exteresses the Tompact of kenlaced burchasing poutor am consumptions while substitution effet desetben holes consumption is in bacted by changing relatiue iacoone le prices o