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

Monopoly, Let''s assume that a monopolist decides to maximize revenue, rath...

Let''s assume that a monopolist decides to maximize revenue, rather than profit. How does this operating objective change the size of the deadweight loss?

Determinant of price elasticity of supply, Assume there is a remote area in...

Assume there is a remote area in china with high population.The area is composed exclusively of apartments and is populated by low-income residents .The people tend to stay in that

Gay lussac''s law of gaseous volumes, Gay Lussac''s law of gaseous volumes:...

Gay Lussac''s law of gaseous volumes: While gases react with each other they always do so in volumes that bears a simple ratio to one and another or to the volumes of the products

Take a test, I have an online test which needs to be done on 60 min, would ...

I have an online test which needs to be done on 60 min, would this website be able to take it with me? like to be available for 60 min answering the multiple choice questions with

Production function models, Production Function Models

Production Function Models

Managrial economics, data of past 20 years regarding price, wage, employmen...

data of past 20 years regarding price, wage, employment, productivity, investment, profit or loss.

Natural resource economics, Normal 0 false false false ...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Explain socio economic development, Question 1: The socio economic deve...

Question 1: The socio economic development of Mauritius has been marked by growth cycles, representing different approaches adopted by Government to meet the internal as well

Expected utility - consumer choice involving risk, Expected Utility: T...

Expected Utility: Theory Assume that a utility index exists which conforms to the five axioms. The expected utility for the two-outcome lottery L = (P, A, B) is given by,

Demand and supply, Dance fans switches away from Dance music to R&B music A...

Dance fans switches away from Dance music to R&B music AND the price of MP3 players increases

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