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

Open access regime , Open Access Regime Normal 0 fa...

Open Access Regime Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

PROPERTIES OF INDIFFERENCE CURVES, #question.PROPERTIES OF INDIFFERENCE CUR...

#question.PROPERTIES OF INDIFFERENCE CURVES WITH TABLE AND DIAGRAM.

Central problems of economy, central problems of capitalist economy

central problems of capitalist economy

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

Money in an economic system, Money facilitates market activities and is ess...

Money facilitates market activities and is essential in complex market systems.  With money people can avoid the problems  associated with coincidence of wants.  Between, these pro

Short run demand curves, If the short run method to produce Q quantity is w...

If the short run method to produce Q quantity is with full time workers L=0.025*Q, COST OF WORKER IN THE SHORT RUN IS w=20226.154, how do you derive the value of Q

Policy measures for private sector investment, Policy Measures for Private ...

Policy Measures for Private Sector Investment Policy measures aimed at reforming education financing was made with two major propositions, viz. (i) Improving the efficiency

Privatisation of the economy:, Privatisation of the Economy: Privatisa...

Privatisation of the Economy: Privatisation has to be viewed in two ways: In a narrow sense, it implies the induction of private ownership in a public sector undertaking. In a

Supply and demand, Explain the meaning of the statement "coffee and tea are...

Explain the meaning of the statement "coffee and tea are close substitutes".

#monopoly, Write a 1-2 page summary on markey failure

Write a 1-2 page summary on markey failure

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