a) Interpret (1). How is this probability constructed? Which parameters determine its value?
c) How does the optimal effort level δ! of agent α2 depend on δ−w, γw, Bw, and j? Explain.
d) Compare δα1 with δα2 when κ = 2 and λ = 1. Can you do the same when κ = λ = i?
a) Interpret the parameters λ, y1, and y2.
b) Derive the policy maker’s iso-loss function.
c) Calculate the policy maker’s optimal policy mix and specify the associated loss Λ.
d) What influences the assignment of a and b?
e) Assume that only the instrument a is available. Calculate the optimal a¯ and show that Λ(a¯) can not be negative. When does Λ(a¯) = 0 hold?
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