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

Define Co-ordination Number, What is Co-ordination Number? A Co-ordinatio...

What is Co-ordination Number? A Co-ordination Number is the total number of ligands which are attached to the central metal atom by co-ordinate bonds or number of atoms of a liga

Explain the post-keynesian economics, Q. Explain the Post-Keynesian Economi...

Q. Explain the Post-Keynesian Economics? Post-Keynesian Economics: A modern heterodox school of economic thought that emphasizes more radical or non-neoclassical aspects of Joh

What was the degree of elasticity, A newspaper recently lowered its price f...

A newspaper recently lowered its price from 50 cents to 30 cents. As it did, the number of newspapers it sold increased from 240,000 to 280,000. i)   Over this price range what

Economic cycle, Economic Cycle The economic cycle is the long-standing...

Economic Cycle The economic cycle is the long-standing sample of alternating times of economic growth (expansion) and decline (recession), followed by changing economic indica

Elasticity, You estimate that the price elasticity of demand for one-acre p...

You estimate that the price elasticity of demand for one-acre plots in Lusaka is -1.5 and that income elasticity of demand is 5. Land owners intend to increase the price of a one-a

Assignment, illustrate graphically the influence of an increase in immigran...

illustrate graphically the influence of an increase in immigrants on the market supply of labour

How have falling commodity prices affected many countries, How have falling...

How have falling commodity prices affected many developing countries? Definition of commodities; raw material like copper, iron and bauxite; and agricultural goods like rice an

Pp curve, how does pp curve solve the problem of how to produce, what yo pr...

how does pp curve solve the problem of how to produce, what yo produce, and when to produce?

Economics, Tc and TVC curves have an inverted s-shape

Tc and TVC curves have an inverted s-shape

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