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

Demand analysis, all information about demand analysis

all information about demand analysis

Econometrics, Due April 8 a) Produce some initial summary statistics of the...

Due April 8 a) Produce some initial summary statistics of the data. b) State the hypotheses that will be tested. Show me advanced results (analyses, not write-up/paper) Due April

Equibilium, Suppose Dlamini has R5 000 to spend on trousers and shirts. The...

Suppose Dlamini has R5 000 to spend on trousers and shirts. The price of trousers is R500 each and that of shirts is R312.50 each. 6.1 Use the information and calculate consumer eq

Estimate all of the parameters in the saving equation, Consider a family sa...

Consider a family saving function for the population of all families in the United States: sav = β 0 + β 1 inc + β 2 hhsize + β 3 educ + β 4 age + u where hhsize is househol

Consumer=m, consumer=m with the help of indifference curve analyis

consumer=m with the help of indifference curve analyis

What do you mean by benefits, Q. What do you mean by Benefits? The bene...

Q. What do you mean by Benefits? The benefit of a project, policy or programme is the positive, expected aspect of an outcome, including the improvement in environmental qualit

Critique of economic reforms, CRITIQUE OF ECONOMIC REFORMS: The critiq...

CRITIQUE OF ECONOMIC REFORMS: The critique of economic reforms should consider the actual growth rate achieved, its impact on employment and poverty reduction, its impact on l

Which of the following statements is true?, Nonmetals tend to gain electron...

Nonmetals tend to gain electrons. A-Metals tend to lose electrons. B-Atoms have the natural tendency to C-fill their outermost shells. All of the above. D-

Difficulties in measuring cost, Difficulties in Measuring Cost  1) Outp...

Difficulties in Measuring Cost  1) Output data may represent an aggregate of different type of products.  2) Cost data may not include opportunity cost.   3) Allocating c

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