#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).

Marginal Revenue, (i) When the demand function is 2Q - 24 + 3P = 0, find th...

(i) When the demand function is 2Q - 24 + 3P = 0, find the marginal revenue when Q=3. (ii) Given the demand function 0.1Q - 10 +0.2P + 0.02P2 =0, calculate the price elasticity of

Preferences toward risk, PREFERENCES TOWARD RISK * Choosing Among Risky...

PREFERENCES TOWARD RISK * Choosing Among Risky Alternatives - Assume - Consumption of a single commodity - The consumer knows all probabilities - Payoffs measured i

Curvature of the iso-quant, Curvature of the Iso-quant: An iso-qunat i...

Curvature of the Iso-quant: An iso-qunat is convex to the origin. This is so because as more and more units labour are employed, the producer would prefer to give up less and

Analyze the characteristics of a monopoly market, Question 1: (a) Descr...

Question 1: (a) Describe the three different ways of calculating national income. (b) Does the National Income figure accurately reflect the living standardof a population?

Macro, supply and demand

supply and demand

Breadtalk fixed and variable costs in singapore.., I wanted to the fixed an...

I wanted to the fixed and variable costs of breadtalk in singapore from economic perspective

Disadvantages of state trading, Disadvantages of State Trading State tra...

Disadvantages of State Trading State trading has several disadvantages. (i) State trading is often afflicted by the corruption and inefficiency usually associated with the pu

Cost theory, if marginal cost descreases then what else is effected by this...

if marginal cost descreases then what else is effected by this

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