Change in credit standards between 1995 and 2005 and its effect on the Great Recession.

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Chapter ST5, Problem 2CQ

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Change in credit standards between 1995 and 2005 and its effect on the Great Recession.

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Consider an obstetrician who can perform two types of deliveries: normal deliveries and cesarean deliveries. Each typeof delivery provides different levels of income for the physician, and the physician has some ability to induce patientsto opt for cesarean deliveries. The model is as follows:The physician’s utility is defined as:U = U(Y, I)where:• Y is the income from performing deliveries.• I is the total disutility from inducementThe income Y from deliveries depends on the type of delivery:Y = Yn · N + YC · Cwhere:• Yn is the income per normal delivery, Yn = 1, 000• YC is the income per cesarean delivery, Yc = 1, 500,• Initial number of births Binitial = 100,• Post-shock number of births Bshock = 90,• a(i) = 0.1 + 0.05i is the fraction of total births that are cesareans, which increases with inducement level i,• the physician sets the inducement level to i = 2.• N = B · (1 − a(i)) is the number of normal deliveries,• C = B · a(i) is the number of cesarean deliveriesDue to a…

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