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

Distinguish between fiscal and monetary policy, Problem: (a) Distingui...

Problem: (a) Distinguish between fiscal and monetary policy, giving examples where appropriate. (b) Explain how fiscal and monetary policies might be used by a government

A consumer sensitivity to interest rates, Interest rate sensitivity can als...

Interest rate sensitivity can also be understood from another perspective.  The total cost of a commodity is not just its price, but also what must be paid to borrow money to purch

How does the gpi adjust for increasing u.s. income, How does the GPI adjust...

How does the GPI adjust for increasing U.S. income inequality? Starting with the category of Personal Consumption Expenditures, the GPI adjusts for enhancing income inequality

Economics, Ask questiowhat are the importance of the branches of economics

Ask questiowhat are the importance of the branches of economics

Determine the is this agent maximizing is utility, 1. Suppose the wage rate...

1. Suppose the wage rate is w = 1. An agent is working 6 hours per day and consumes 5 units of goods per day. Suppose that the agent claims to be indifferent between his current

Money and mortgage, Money: Broadly speaking, money is anything which can be...

Money: Broadly speaking, money is anything which can be used as a means of payment (for instance, to settle a debt). It includes bank deposits, actual currency, credit cards and li

Money and banking., excess reserve make a bank less vulnerable to runs.why

excess reserve make a bank less vulnerable to runs.why

Market supply of labour, graphical illustrations describing the influence o...

graphical illustrations describing the influence of an increase in immigrants on the market supply of labour

Write Your Message!

Captcha
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!

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