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

Programming and input-output models, Normal 0 false false f...

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

Implementation of economic policy, Implementation of economic policy: ...

Implementation of economic policy: On the ability of civil servants and Government to learn, Government must possess the following qualities to ensure implementation of econom

Homework, the difference between an lc3 and other types of businesses is th...

the difference between an lc3 and other types of businesses is that

Lack of integration in policy formulation, Lack of Integration in Policy Fo...

Lack of Integration in Policy Formulation and Policy Implementation: A common thread uniting these diverse diagnoses and prescriptions can be seen among most of the critical e

Narrowness of definition of the commodity, Explain why each of the followin...

Explain why each of the following factors may influence the own price elasticity of demand for a commodity. (i) Consumer preferences, that is, whether consumers regard the commodi

Explain the monopsonistic discrimination, The role of trade union to improv...

The role of trade union to improve the lot of the workers is also important when there prevails the conditions of Monopsonisitc discrimination is said to prevail when the monopsoni

Consumer surplus, detail of consumer surplus with examples

detail of consumer surplus with examples

Explain variations in geographic immobility, Wage Differentials: Market str...

Wage Differentials: Market structure alone does not account for all of the differences in wages and employment. Market wage differentials arise from various other sources, includin

Hydrocarbons, Structure of benzene

Structure of benzene

Effects on factor prices, Assuming the Heckscher-Ohlin model is true. Suppo...

Assuming the Heckscher-Ohlin model is true. Suppose the Cuba and Russia sign a free trade agreement. Furthermore, assume the Cuba and Russia only produce cigars and vodka. Russia h

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