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Problem Set 3 2018

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Problem set #4 This assignment goes through the model of informal insurance, and credit markets with limited liability and moral hazard (lecture notes “Credit”). A suggestion: If I were in your position, before I work on this assignment I would look at the slides titled “Credit” and work through each model on paper, making sure you understand the meaning of each step. After you are done with that, you should try this assignment without help. If you get stuck, look again at the lecture notes. Part A: Informal Insurance (10 points) The table below shows the average production among three farmers in Oommo Nadda, a village in rural Ethiopia. On average, production among these three farmers is 50 quintals per year. The table below shows production this year. Assume that the three farmers have a full risk sharing agreement that includes only themselves. Fill out the table with the appropriate numbers. Name of farmers Average harvest among three farmers Harvest for each person this year Amount consumed (after informal insurance) Idiosyncratic shock Rashid 50 Ahmed Ibrahim Aggregate shock 83 60 23 10 50 52 60 -8 10 50 45 60 -15 10 Part B: Formal Insurance B ...
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