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

Intro to economic thinking, There are 2 brands of cell phones that are almo...

There are 2 brands of cell phones that are almost identical except for some minor features: the A-Phone and the Pomegranate. Part I Draw the demand curve for the A-Phone. Explain

Trigger strategy - self sustainable, Consider an infinitely repeated prison...

Consider an infinitely repeated prisoner's dilemma game by two players. The resultant payoffs at each stage by the actions of two players are given below in the table (payoffs are

Income elasticity, With the recession, average incomes have fallen from $44...

With the recession, average incomes have fallen from $44,375 to $41,720.  Before the recession Groucho's Gizmos sold 600 gizmos a month. As an economics, predict the number of gizm

Kolbey:s reaction, why can methane not be prepared by this reaction

why can methane not be prepared by this reaction

What is the difference between economics and business, What is the differen...

What is the difference between economics and business?  Economics is the study of how we, the people, engage ourselves in production, distribution and consumption of goods and

Indifference curve, what are the properties of indifference curve

what are the properties of indifference curve

Economic value to customer, Economic Value to Customer Economic V...

Economic Value to Customer Economic Value to Customer = EVC x = [LifeCycle costs of a competitor's product in relation to a home firm] - [Start-up Costs for the home fir

Lambs lay a golden egg, Assume that the market for lamb is perfectly compet...

Assume that the market for lamb is perfectly competitive. Using an appropriate model (or models) illustrate and explain a. How a competitive market arrives at equilibrium

Distribution of income, Q. Distribution of income? Distribution:Distrib...

Q. Distribution of income? Distribution:Distribution of income reflects the process by which real output of services and goods produced by the economy is allocated to different

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