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

What is meant by minimum wage, What is meant by minimum wage?  The min...

What is meant by minimum wage?  The minimum wage is the minimum rate a worker can legally be paid (usually per hour) as opposed to wages that are examined by the forces of sup

New classical busines cycle thoery, NEW CLASSICAL BUSINES CYCLE THOERY: ...

NEW CLASSICAL BUSINES CYCLE THOERY: Yang, Xioaokai,  Economics: New Classical versus Neoclassical Frameworks, Oxford: Blackwell Publishers.  The book goes on to rigorously dev

Location of industry and localization of industry, Location of industry and...

Location of industry and localization of industry: Location of industry tries to answer the key economic question "where to produce". It involves deciding on the area that an

Describing risk, Describing Risk * To measure risk we should know:  ...

Describing Risk * To measure risk we should know:  1) All the outcomes which are possible.  2) The probability that each outcome will occur. * Interpreting Probability

Canon, analyze Swot of Canon

analyze Swot of Canon

Composite goods, what is the effect on the market for dvd players if the pr...

what is the effect on the market for dvd players if the price of dvd rises

Excel Graphing/Writing Assignments for EC215-Princip, 1. Go to the website ...

1. Go to the website for MarginalRevolution. Find">http://www.marginalrevolution.com Find two posts that related to microeconomic topics that we are covering and write about on

Nomal, what monopoly market .

what monopoly market .

Microeconomic international policy, Ask questi‘Social welfare functions emb...

Ask questi‘Social welfare functions embody a normative conception of the relative importance of equity and efficiency’. With the aid of diagrams, illustrate and explain this propos

Assignment, Illustrate and discuss the impliction of various market structu...

Illustrate and discuss the impliction of various market structures(competitive and non-competitive)

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