ing to neoclassical theory. Describe and analyse labour demand in a monopsony.

(b) Describe and analyse the effect of an increase in the minimum wage on employment in a monopsony.  In your answer include the relevant graphs.

(c) Describe and analyse the “Difference-in-Difference” (DiD) Method- ology. In your answer include the relevant graphs.

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2.  (a) Describe Pauly’s (The Economics of Moral Hazard: Comment,

1968) analysis of moral hazards. If there is a positive externality to the demand for health care, what will be the effect on welfare loss due to moral hazard?

(b) Assume that the current wealth of an individual is f1000 and its utility function U (① ) = ln ① , where ① is wealth. There is a gamble where the individual wins f800 with 20% probability and loses f200 with 80% probability. If the gamble is repeated 2000 times, would the individual take the gamble? In your explanation use the expected wealth and the expected utility from taking or not taking the gamble.

(c) A risk-averse individual with utility function U (① ) = ^① (where

① represents wealth) and initial wealth of f1000 faces a 50% chance of falling very ill. If this individual falls ill, he faces a loss of f500. What is the actuarially fair premium? What is the risk premium?  What is the maximum value of insurance he would be willing to pay? Would he buy insurance for a price of f272? In your answer use any relevant graphs.

3.  (a) Introduce and explain the standard economic model for the de- cision to commit a crime.

(b) Introduce and explain crimes in a market context.  In your ex- planation use the relevant graphs.

(c) Assume that we have 2 years of data on age, gender, wage, and

3 levels of education (“high”, “medium” and “low”) of individ- uals who are continuously employed in the same job for both years. Develop a linear regression model which can estimate the effect of age, gender and education on wages and interpret all its coefficients.

Assume that wages can also be influenced by annual performance evaluation scores, tenure (years in the current job) and if they had any working experience before their current job.  However, the problem is that we cannot observe these variables. Write a model which includes the effect of these new characteristics on wages and show how you could address the main endogeneity issue that occurs.

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4.  (a) Describe and analyse the econometric specification for the ra- tional and for the myopic addiction model that is introduced in Becker, Grossman and Murphy, AER, 1994.

(b) What are the welfare gains from: i) a positive externality in the demand for goods, and ii) a negative externality in the supply of goods. In your answers use the relevant diagrams.

(c) In a two-goods economy, a consumer’s utility depends on recre- ation (i.e. number of visits to the park, u), and a consumption good (z). The utility function is U (u．z) = ln(u0．6z0．4) with a budget constraint 1．2u + 0．8z = 4.

(i) Using the Lagrange multiplier method, find the number of visits u and the amount of the consumption good z that maximise this consumer’s utility.

(ii) How would you interpret the effect of the Lagrange multiplier (λ) in this case?