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

Common property regime , Normal 0 false false false EN-...

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

Find the monopsony first mover competitive fringe buyer, Draw the suitable ...

Draw the suitable graph for each situation and describe a real world situation in health care in which the market structure utilized in the question may exist. Demand: P=6,000-0

Duality theorems, Duality Theorems: The relationship between the direc...

Duality Theorems: The relationship between the direct and indirect utility functions may be described by a set of duality theorems. The following illustrative theorems are pro

Production possibility curve, In 1939 the U.S. economy was operating where ...

In 1939 the U.S. economy was operating where in the production possibility curve?

Consumer behaviour, identify three factors to criticize the theory of consu...

identify three factors to criticize the theory of consumer behavior or utility theory

Describe the concept of opportunity cost, Problem 1: a. Describe the co...

Problem 1: a. Describe the concept of opportunity cost, using the production possibility curve. b. What are the fundamental problems of an economy? Describe how the command

Determinants of private demand - waiting-time for employment, Determinants ...

Determinants of Private Demand - Waiting-Time for Employment ‘Waiting time’ for employment is another important factor. The waiting time varies from course to course. For inst

Significance of wastage in supply and demand calculus, Normal 0 ...

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

Duality, duality was used in comparative static approach in assessing the d...

duality was used in comparative static approach in assessing the direction of change on economic variables . Why do we need duality and under what condition may duality can''t be u

Explain the industrial revolution, The Industrial Revolution The centur...

The Industrial Revolution The century after 1750, saw the industrial revolution proper: invention of steam engine, spinning jenny, power loom, hydraulic press, railroad locomot

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