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

Average total cost, Average Total Cost (ATC): ATC is the total cost per uni...

Average Total Cost (ATC): ATC is the total cost per unit of output. ATC = TC/y = (TFC + TVC)/y = AFC +AVC ATC falls sharply at the beginning of the production process because

Available resources with the desired goals, Available resources with the de...

Available resources with the desired goals: To match the available resources with the desired goals: The complementary nature of some investment decisions make for planning. T

Role of managerial economist, Explain the role of managerial ecnomist in ki...

Explain the role of managerial ecnomist in kissan &dipsy fro ub group

Production vs cost - resource flow, With current technology, suppose a firm...

With current technology, suppose a firm is producing 400 loaves of bread daily. Assume that the least cost combination of resources in producing those loaves is $180 ( 5 units of

Infrastructure , Infrastructure : Infrastructure plays an important ro...

Infrastructure : Infrastructure plays an important role in the development of an economy. The adequacy or lack of it determines an economy's success or failure in increasing p

Current daily status(cds), Current Daily Status(CDS): The reference pe...

Current Daily Status(CDS): The reference periods (i.e. a year, a week and a day) are basically used to describe the period for which the workers are employed in the economy. T

Accompanying table , The accompanying table represents the price and yearly...

The accompanying table represents the price and yearly quantity sold of ice cream cones on Sidfield Island.   Price of Ice Cream Cones Quantity of Ice Cr

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