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

Price elasticity, Price Elasticity A measure of the change in demand fo...

General equilibrium, equilibrium of production

Intermediate microeconomics, show that the necessary and sufficient conditi...

What are the parts of valuable economics paper, What are the parts of valua...

Lndifference curve, Indifference curve definition

Types of privatisation of the economy, Privatisation in the narrow sense ca...

Draw a graph of the market for reserves, During summer of 2006, China incre...

Rational producer, in the context of managerial economics how do you explai...

Production possibilty curve, why is the point outside the production possib...

Arc elasticity, Arc Elasticity is defined below: Arc elasticity measure...

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