Microeconomics - With Access (Custom)
20th Edition
ISBN: 9781259877551
Author: McConnell
Publisher: MCG
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Chapter 8, Problem 6DQ
To determine
The risk averse nature towards a neutral result.
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Suppose a two-person household. Person 1 has h1 units of time available and takes l1 units of leisure time, and person 2 has h2 units of time available and takes l2 units of leisure time. Collectively, the two persons in the household care about their total consumption c, and their total leisure l=l1+l2, and they have preferences over their total consumption and total leisure just as specified in the course. But person 1 faces a market wage w1, and person 2 faces a market wage w2, with w1 > w2.
1) Draw the budget constraint faced by the two-person household. What will the household do, that is, how much does each household member work?
2) What happens if w2 rises? (w1 > w2 still holds)
3) Explain your results and interpret
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Newfoundland’s fishing industry has recently declined sharply due to overfish- ing, even though fishing companies were supposedly bound by a quota agree- ment. If all fishermen had abided by the agreement, yields could have been maintained at high levels. LO4
Model this situation as a prisoner’s dilemma in which the players are Company A and Company B and the strategies are to keep the quota and break the quota. Include appropriate payoffs in the matrix. Explain why overfishing is inevitable in the absence of effective enforcement of the quota agreement.
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