# Assume that angela is a utility maximising

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Assume that Angela is a utility maximising independent farmer, who rents the land from landownerBruno.Further assume that the rent Bruno receives in terms of bushels of grain is higher than the number ofbushels of grain Angela gets to keep for herself.Angela is free to leave, but chooses to work on Bruno’s land.MRT = the quantity of some good that must be sacrificed to acquire one additional unit of another good. Atany point, it is the slope of the feasible frontier.Here, it shows that when subsequently hours of free time are transformed into working hours, this at firstcontributes very much to extra production (from t=24 to t=18-20, the curve is very steep) since the farmerhas lots of energy. Thereafter, additional sacrifices of hours of free time contribute proportionally less toextra production: the curve gets flatter, due to diminishing labour productivity.This is more realistic than a linear curve, which would mean that every extra hour of free time turned intoworking time, generates the same amount of extra production.Points: 2 for explaining MRT, 3 for explaining concavity, 1 for briefly addressing linearityNB: mentioning that MRT is (minus) the slope of the feasibile frontier is not enough. There needs to be someexplanation of the economic meaning of MRT and therefore the concavity of the feasible frontier.Several viewpoints/argumentation lines are correct.Fair in a procedural sense, because they are ‘consenting adults’ who choose to trade like this: there isagreement on therules of the gameUnfair in a substantive sense, because thedivision of the surplus is very skewed: the net gains for Angelaare smaller than for Bruno. NB: how this division comes about does not influence substantive fairness.Or: unfair in the procedural sense. The book (page 189, section 5.3) gives 3 criteria for procedural fairness:-Voluntary exchange of private property acquired by legitimate means-Equal opportunity for economic advantage-DeservingnessThere is a voluntary exchange in this case, but you can argue whether there is an equal opportunity and ifwe look at deservingness then it is clearly not fair in the procedural sense, because Angela is working butBruno gets more money.c)Is this arrangement fair or unfair in asubstantivesense and is it fair or unfair in aproceduralsense?.Points: 2x3
Microeconomics, Institutions and WelfareFinal exam25thJanuary 2019, 1:30 – 4:30 PMSuppose instead that Bruno charges a rent that is equal to 25% of Angela’s daily production.d) Angela and Bruno are together in a so-called principal-agent relationship. Briefly explain why their(rental) contract could be characterised asincomplete. Mention two problems that may arise.
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