#question.Question: Answer all parts (a, b, c, d, e & f)., 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:- #question.Question: Answer all parts (a, b, c, d, e & f).

Economics, in economics what is cobb douglas theory?

in economics what is cobb douglas theory?

ENVIRONMENTAL POLLUTION TYPES, Pollutant Any substance, species produc...

Pollutant Any substance, species produced either by a natural source or by human activity, which produces very adverse effect on the environment is called pollutant. Some commo

Strategy to fight ntb and reorganisation of export councils, Reorganisation...

Reorganisation of Export Councils: India has a large number of exporpromotion councils, commodity boards and other similar agencies, butheir impact on India's foreign trade h

Point elasicity, Q=10-2P,PRICE DECREASE FROM RS 3 TO 2

Q=10-2P,PRICE DECREASE FROM RS 3 TO 2

Dividend, Dividend The distribution of an organizations earnings to it...

Dividend The distribution of an organizations earnings to its owners-the stockholders. Cash dividends are most ordinary, although partition can be issued in other forms, such

S block elements , #question.what is the periodc clasification?.

#question.what is the periodc clasification?.

Supply, plese give me supply assigement

plese give me supply assigement

Demand and supply, If demand goes down what happens to the equilibrium?

If demand goes down what happens to the equilibrium?

Distribution of income, Q. Distribution of income? Distribution:Distrib...

Q. Distribution of income? Distribution:Distribution of income reflects the process by which real output of services and goods produced by the economy is allocated to different

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