User Account

All Pages

Microeconomics, Microeconomics

Assignment Help:
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:- Microeconomics

Pure competition markets, what is pure competition markets?

what is pure competition markets?

Demand theory, New developments

New developments

Majority minority, Are there any economic effects to non-Hispanic whites, g...

Are there any economic effects to non-Hispanic whites, given that they no longer represent the majority of the population? Why are these examples important from an economic standpo

Explain why goods provided by natural monopolies, Explain why goods provide...

Explain why goods provided by natural monopolies are often publicly owned. It would seem that most normal monopolies come with high MSB and also that society has deemed these g

What do you mean by the utility function, What do you mean by the utility f...

What do you mean by the utility function? The Utility Function: Sometimes this is easier to work directly along with the preference relation and its connected sets. Althou

#ttitl derivation of demand funcation, derivation of demand funcation usin...

derivation of demand funcation using indifferance curv ordelreay and competed demand curv

Competitive equilibrium, (a)    Explain why the Pareto criterion does not p...

(a)    Explain why the Pareto criterion does not provide a complete ordering of the ordinal utility space (b)   The competitive equilibrium is the only allocation where the gain

Choose a topic from microeconomics ., choose a topic from microeconomics th...

choose a topic from microeconomics that matters to you and find a recent news article covering that topic?

#title.macro, TAKE A HYPOTHETICAL ECOMOMY AND CONSTRUCT THE CONSUMPTION SCH...

TAKE A HYPOTHETICAL ECOMOMY AND CONSTRUCT THE CONSUMPTION SCHUDEL CONTAIN 10 PAIR OF HYPOTHETICAL VALUE OF AGGERGET INCOME AND CONSUMPTOIN

Indifference curves, Indifference Curves: Every consumption-leisure point,...

Indifference Curves: Every consumption-leisure point, (l; c), in the diagram is associated with a unique level of utility. The line II represents the individuals indifference curv

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