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Assignment 1
ECN 514
•This is an individual take-home assignment. Your answers, including graphs, are to be prepared on your own.•In order to receive full credit for your work, you need to provide complete and detailed answers, and list all the resources you used.•Font at least 11. The rest (style, number of pages, number of pages, etc.) is completely up to you.
Exercise 1 (20 points)
My son, Adam, is a 3rd grader in the KAEC elementary school. In his class, there are girls and boys; same age 8. Kids come from various countries – Saudi Arabia, USA, Iraq, Egypt, Pakistan, and Poland – but they all speak English in the school. They like to learn but, let’s be honest, it is difficult to grab and hold their attention: whoever teaches them must use very good examples they can relate to.
In this exercise, your task is to explain to my son’s class what moral hazard and adverse selection are. Keep in mind the audience that you are talking to. In addition, refrain from using the examples we discussed in our class.
Exercise 2 (30 points)
Imagine a group of 50 MBA students going to the same business school. As part of their perks, the school provides them the free Wi-Fi. Importantly, the school’s Wi-Fi is the only access to the internet the students can have while attending their courses. (No mobile signal, no landline or fiber internet; just Wi-Fi.)
Having access to the internet is important to all the students for both professional and personal reasons. In addition, and not surprisingly, they prefer fast internet over slow internet.
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The school pays for the data that students use. The more data the students use, the higher the bill. In order to avoid a bill too high, the school slows down the internet when the students had consumed too much of data. In other words, if students use too much data, all are worse off as the internet becomes slower.
In class, we saw a similar problem. What is a name of that problem?
Our solution to this problem was the government intervention. However, in this case, the school (which we can think of as the government/authority) does not want to intervene. If you were among those 50 students or if they were to ask you for help, what would you do or suggest they do? Quitting the school or relocating the school are not the options. You must solve the problem within the given parameters.
Exercise 3 (20 points)
In class we conducted the economic analysis (i.e., change in price, quantity, and social welfare) of introducing a per unit tax (i.e., specific tax) in a competitive market. In this exercise, your task is to conduct the economic analysis of introducing an ad valorem tax (i.e., proportional tax like VAT) in a competitive market. Your analysis should include both graphical analysis and its description.
Exercise 4 (30 points) (inspired by Bader Alsanie)
Last-year news from Saudi Arabia:
The Council of Ministers, presided over by the Custodian of the Two Holy Mosques King Salman at Al-Salam Palace here on Tuesday, has decided to allow commercial activities to continue round the clock in return for fees that the Minister of Municipal and Rural Affairs will specify.
Sources: http://saudigazette.com.sa/article/572089, https://www.arabnews.com/node/1526731/saudi-arabia
In this exercise, your task is to conduct the economic analysis (i.e., change in price, quantity, and social welfare) of the above regulation in some specific market that this regulation affects.
First, you need to determine which market will be affected by allowing “commercial activities to continue round the clock.” Second, conduct the economic analysis. Your analysis should include both graphical analysis and its description.


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