Microeconomics, Consider the following insurance market. There are two states of the, Microeconomics

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]

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages

Microeconomics, Microeconomics

Related Discussions:- Microeconomics

Marginal Value Product, how do I find the marginal value product?

General equilibrium , How to solve general equilibrium in pure exchange eco...

Economic reforms and foreign investment inflows, Economic Reforms and Forei...

Microeconomics supply and demand curve question, I''m having trouble with t...

2252, Inflation is defined as

Explain the price inflation and wage inflation, What is the difference betw...

Demand and supply analysis, economic analysis of demand on retailer in ustr...

Contenporary issues, what the contenporary issues in micro economics in nig...

Slutsky equation, how to solve min (x+y/2, 2y+3x, 3x)

Health and life expectancy, Health and Life Expectancy: In addition t...

Write Your Message!

Featured Services

Online Tutoring

Project Development

Exam Preparation

Course Help

Assignment Help

Popular Subjects

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT