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

Dependence on agricultural production, Dependence on agricultural productio...

Dependence on agricultural production: Dependence on agricultural production and primary product for exports. The external sector comprises Imports and Exports, Ghana shows de

State the keynesian theory of employment, Q. State the Keynesian Theory of ...

Q. State the Keynesian Theory of employment? Under employment Theory, Govt interference Aggregate Demand- Aggregate supply- Effective demand, Income and employment consumption

Proportion of workers, Proportion of Workers in Organised and Unorganised W...

Proportion of Workers in Organised and Unorganised Workers: Increasing share of employment in unorganised sector reflect the deterioration in the quality of employment because

Internal and external economies of scale, Internal and external economies o...

Internal and external economies of scale: Internal economies of scale are the advantages or benefits that the firm enjoys as it expands its size or increases its scale of ope

Market failure, causes of market failure and its solutions?

causes of market failure and its solutions?

Markets, under which market structure does the banking sector fall?

under which market structure does the banking sector fall?

Measuring economies of scale in long run, Economies and Diseconomies of Sca...

Economies and Diseconomies of Scale -Economies of Scale Increase in the output is greater than increase in the inputs. -Diseconomies of Scale Increase in the

Find the elasticity of demand for a quantity, The demand curve for gasoline...

The demand curve for gasoline is P = 200 - 10Q. a.  Find the elasticity of demand for a quantity of 8. Does this number imply that quantity demanded is sensitive to price change

Economies of common services, Economies of Common Services: Through th...

Economies of Common Services: Through the concentration of firms in a particular industry in a given geographical location, the firms may enjoy certain commonservices.These

Hi, I have an assignment need to be done

I have an assignment need to be done

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