#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

Consumer behavior, Consumer Behavior The description of how consumers...

Consumer Behavior The description of how consumers allot their resources (income) to the purchase of various goods and services to get maximum in their well being. There a

What types of questions would concern microeconomics, What types of questio...

What types of questions would concern microeconomics, versus macroeconomics? Microeconomics concerns itself with decision-making of individual consumers, firms  and other organ

Explain the monopolistic excess capacity, Theories of Chamberlin’s monopoli...

Theories of Chamberlin’s monopolistic competition and Joan Robinson’s imperfect competition have revealed that a firm under monopolistic competition or imperfect competition in lon

#question.Question: Answer all parts (a, Consider the following insurance m...

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

Oligopoly, what is The most important source of oligopoly?

what is The most important source of oligopoly?

Explain function of central bank, Q. Explain Function of Central Bank? ...

Q. Explain Function of Central Bank? Central Bank: A public financial institution, generally established at the national level and controlled by a national government that sets

Expected utility - consumer choice involving risk, Expected Utility: T...

Expected Utility: Theory Assume that a utility index exists which conforms to the five axioms. The expected utility for the two-outcome lottery L = (P, A, B) is given by,

Future directions - economic policies, FUTURE DIRECTIONS: It is often ...

FUTURE DIRECTIONS: It is often said that the difficult things are the beautiful things, and if they are as vital for healthy national development as an economy, society and po

Macro ecomomics, explain how macro and micro issues may be represented usin...

explain how macro and micro issues may be represented using production possibility curve

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