insurance, #question.Question: Answer all parts (a, b, c, d, e & f). Consider the, Microeconomics

insurance, Microeconomics

Assignment Help:

#question.Question: Answer all parts (a, b, c, d, e & f).

Consider the following insurance market. There are two states of the world, B and G, and two types of consumers, H and L, who have probabilities pH =0.5 and pL =0.25 (high and low risk) respectively of being in state B. They have common endowment e=(eG,eB) = (£900, £100). The individuals have expected utility preferences over state-contingent consumptions c=(cG,cB), with common utility function u(ci)=ln(ci), where i=B,G. Insurance firms are risk-neutral profit maximisers and offer contracts in exchange for the individuals’ endowments.

Suppose the market is competitive.

a) Outline the definition of a competitive equilibrium of this market and explain why every contract, offered by every firm, must earn zero profit in equilibrium. [7 marks]

b) Suppose the information concerning individuals’ types is symmetric, but void. It is commonly known, however, that the proportion of low risk consumers is 0.4. Derive the equilibrium set of contracts. [5 marks]

c) Find the equilibrium set of contracts when information is symmetric and perfect. [5 marks]

Now suppose that information is asymmetric; individuals know their own type but insurance firms cannot distinguish between types. (Note: there does exist an equilibrium set of contracts for this market. You may make use of this fact without proving it).

d) Explain why it must be that, if {cH,cL} is the equilibrium set of contracts, then
cH ? cL. [4 marks]

e) Explain and derive the equilibrium contract offered to high risk individuals. [3 marks]

f) Explain and derive the equilibrium contract offered to low risk individuals. [9 marks]

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages

insurance, Microeconomics

Related Discussions:- insurance

Conservaton of mass, IN THE LABORATORY OXYGEN IS PRODUCED BY HEATING POTASS...

#title., what is iso curve

3, . Crumble Corporation produces cookies. Here is the relationship betwee...

Production, What are the factors that determine the volume of production?

Cholesterol within acceptable limits, The recent flooding in the upper Midw...

Derived demand, which is the following is an example of a firm''s derived d...

Assignement, need help for my micro assignment

Factors shifting demand curve, Factors Shifting Demand Curve: ...

Marginal product of a factor, Marginal Product (MP) of a Factor: From ...

Perfect market, For the pizza seller whose marginal, average variable, and ...

Write Your Message!

Featured Services

Online Tutoring

Project Development

Exam Preparation

Course Help

Assignment Help

Popular Subjects

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT