insurance, Microeconomics

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

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]
Posted Date: 4/25/2012 1:33:23 AM | Location : United States

Related Discussions:- insurance, Assignment Help, Ask Question on insurance, Get Answer, Expert's Help, insurance Discussions

Write discussion on insurance
Your posts are moderated
Related Questions
Question : (a) Suppose Firm A is a perfectly competitive firm producing good X and faces the following average revenue and average cost Average Revenue: P = 10 Average Co

The goal is to replicate a real life product development and familiarize students with the invent process of a system, component, or process to meet desired wants within realistic

criticism of cournot model

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 commod

Indirect Utility Functions: Let qi denotes commodity i and pi is the price of that commodity. Let y denotes money income of the consumer. Suppose vi = pi/y. The budget constra

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

CONCEPT AND MEANING OF INFRASTRUCTURE: Infrastructure sectors are the backbone of a national economy. It has been commonly opined that infrastructure development is closely re

Price: The price factor is another important variable to be included in demand analysis. Here one has to consider the prices of the product and also its substitute and complement

For each of the following scenarios, you use a SS & DD diagram to demonstrate the effect of a given shock on equilibrium price and quantity in specified competitive market. Explain