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

Determine the fiscal policy, How might an accurate value for the multiplier...

How might an accurate value for the multiplier aid a government in setting fiscal policy? Any given multiplier will enhance national income at a given rate times enhance in gov

What do you meant by relative poverty, Q. What do you meant by Relative Pov...

Q. What do you meant by Relative Poverty? Relative Poverty: A measure of poverty based on an individual or family's relative income compared to overall average level of income

Copper, Around 2007, the world copper price was $2.00 per pound and 12 mill...

Around 2007, the world copper price was $2.00 per pound and 12 million metric tons per year was the quantity transacted. A) Assume copper’s demand elasticity is -.5 and supply elas

Compute marginal cost and average total cost, 1.  What is the relationship ...

1.  What is the relationship between a firm's total revenue, profit and total cost? Give an example of hypothetical data and draw the curves. 2.  Define economies of scale and e

Market supply of labour, graphical illustrations describing the influence o...

graphical illustrations describing the influence of an increase in immigrants on the market supply of labour

Herfendahl index, #qu3. An industry is composed of 20 firms, all with equal...

#qu3. An industry is composed of 20 firms, all with equal sales. The Herfendahl Index ratio in this industry is a. 1000 b. 500 c. 800 d. This cannot be determined from the informat

Graphing, I can''t figure out how to graph the aggregate consumption functi...

I can''t figure out how to graph the aggregate consumption function and the aggregate saving function

Iso cost, schedule and diagram of iso cost

schedule and diagram of iso cost

Write Your Message!

Captcha
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!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd