#question.Question: Answer all parts (a, b, c, d, e , 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

Revenue, draw the supernormal curve

draw the supernormal curve

Theory of production, when total production fall what,s the status of avera...

when total production fall what,s the status of average product and marginal product

Explain supply vs. quantity supplied, Define and explain the following econ...

Define and explain the following economic terms: Economics, Microeconomics & Macroeconomics Positive vs.  Normative Economics Law of Diminishing Marginal Utility Opport

Gross domestic product and growth rates, Gross Domestic Product and Growth ...

Gross Domestic Product and Growth Rates: The rate of growth of the secondary and tertiary sectors has been more than double that of the primary sector, with the secondary sect

Cost sharing in higher education - student loans, Cost Sharing in Higher Ed...

Cost Sharing in Higher Education - Student Loans The method is popular as it directly targets only those who are the recipients of the benefits of higher education.The method

ADVANCE ECONOMICS, THERE IS PRESSURE ON THE CENTRAL BANK TO INCREASE MONEY...

THERE IS PRESSURE ON THE CENTRAL BANK TO INCREASE MONEY SUPPLY WHAT WOULD BE THE EFFECT ON THE MACROECONOMIC VARIABLE

What are the problems of the transport sector, Question 1: A good inter...

Question 1: A good internal transport network is a sine-qua-non condition for development. What are the problems of the transport sector? Question 2: ICT has a defin

PROBLEM, Sita expects her future earnings to be worth Rs. 100. If she falls...

Sita expects her future earnings to be worth Rs. 100. If she falls ill, her expected future earning will be Rs. 25. There is a belief that she may fall ill with probability of , -

Long run eq, The raspberry growing industry is a perfectly competitive indu...

The raspberry growing industry is a perfectly competitive industry. The firms in the industry have a U-shaped LAC, minimum average cost is $8 and the minimum efficient scale is 4 u

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