Author Question: The case where people purposely act in a careless way, for example, driving recklessly because they ... (Read 154 times)

CharlieWard · **on:** Jun 30, 2018

The case where people purposely act in a careless way, for example, driving recklessly because they are insured, is called

A) asymmetric information.
B) risk aversion.
C) moral hazard.
D) bounded rationality.
E) thrill-seeking.

Question 2

The Heckscher-Ohlin model is famous for being elegant and mathematically sophisticated, yet failing to describe reality. One manifestation of this fact is Trefler's Case of Missing Trade. Explain what exactly is missing.

In what sense is it missing? How would you explain why it is missing? How can a relaxation of the identical production functions explain the case of the missing trade? How did the results obtained by Davis and Weinstein strengthen support for the validity of the HO model?

sarahccccc · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C

Answer to Question 2

Trefler demonstrated that the actual volume of world trade is significantly less than that which would be predicted by the Heckscher-Ohlin model. One explanation is that North-South trade is especially less than would be predicted by a factor proportions model. If technologies differ in the poorer countries, then it is possible that the cost of producing a product, which uses relatively much of their abundant factor may still be higher than the cost of producing it in the other country. Davis and Weinstein showed that, relaxing the restrictive assumptions regarding technology, goods, and trade costs, yielded empirical results that support the model.