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2. Currently, Krona has currently no compensation scheme for workers infected with the disease and you are advising the government on the introduction of such a scheme (suppose for this exercise that there are no other unemployment or sick benefits and this would most likely concern any future disease). Model the economy with identical individuals who earn a wage of 500 while working and 0 when sick with the disease. With probability q, the individuals get sick with the disease and cannot work. When sick, individuals would receive a sickness compensation s from the government. To finance the scheme, when working individuals pay lax of (500*t) where t is the tax rate. u(c) = c1/$ denotes the individuals utility from consumption of c in any given state. a) Write down the individual's expected utility as function of s, q and t. [3 marks] b) What is the government's budget constraint for an actuarially fair compensation scheme; write down what is balanced government budget in terms of s, q and t. [2 marks] c) Find the value of compensation s that maximizes individuals expected utility, assuming a balanced budget. [6 marks] d) What is the tax rate t required to finance the compensation maintaining a balanced budget? Discuss very briefly the intuition (2 sentences). [4 marks] e) Discuss briefly the merits of the introduction of such a disease specific compensation scheme, including a brief discussion of moral hazard. [5 marks]4. Human Capital Accumulation Consider our basic, two-period model of Human Capital Accumulation. That is, the individual is born with some level of human capital, Hi, and must decide in each period t = 1,2 what fraction of time they should invest in human capital accumulation 0 0, 0