User Account

All Pages

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]

Related Discussions:- insurance

What is tradeable product, Q. What is Tradeable product? Tradeable:A pr...

Q. What is Tradeable product? Tradeable:A product (a service or good) is tradeable if its purchaser can purchase it far away from the place where it is produced. Most goods (ot

Calculate marginal costs and Pbook-estimated market price, Question Yo...

Question You are the COO at PineApple, a company that produces notebook computers for business people. The company has just developed a new model - Pbook. For production of P

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

. Crumble Corporation produces cookies. Here is the relationship between the number of workers and output (in dozens of cookies) in a given day: Workers Output Marginal Product

Equilibrium exchange rate, Equilibrium Exchange Rate: The theory of ex...

Equilibrium Exchange Rate: The theory of exchange rate determination explains how demand and supply of foreignexchange interact and jointly determine the equilibrium exchange

Perfect competition, i when should continue to produce in the short run

i when should continue to produce in the short run

Cost sharing in higher education - student loans, Cost Sharing in Higher Ed...

Cost Sharing in Higher Education - Student Loans The method is popular as it directly targets only those who are the recipients of the benefits of higher education.The method

Definition of labour force, Q. Definition of labour force? Labour Force...

Q. Definition of labour force? Labour Force:Total population of working-age people who are willing and able to work and who thus have ‘entered' labour market. Labour force incl

Determine the action keep the price above market equilibrium, What actions ...

What actions could a government take in order to keep the price above market equilibrium? There are four basic possibilities here; 1) Minimum price;  2) A tax on the good

Nash equilibrium, what is a sub game perfect Nash equilibrium

what is a sub game perfect Nash equilibrium

Markets forces supply and demand, what does it mean by a normal good ?

what does it mean by a normal good ?

Write Your Message!

Captcha
Order Assignment

Featured Services

Order Now

Popular Subjects

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +91-977-207-8620

Phone: +91-977-207-8620

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd