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
How can we identify that something is elastic or inelastic?  When demand of any commodity does not change with the change in price of that commodity that item is said by inelas

Inflation is not possible under the gold standard.” Is this statement true, false, or uncertain? Explain your answer.

Creating Mobile Telephone Infrastructure: The second concept of subsidising the telecom infrastructure required for providing services in rural and remote areas is designed to

Externalities: Many economic activities have collateral effects (at times positive, but more often negative) on other people who aren't directly involved in that activity. Illustra

Uses of population census: It is used to determine the size and the growth rate of the population at a country. The helps the government in planning for education, transporta

What is the classical model's explanation for involuntary unemployment? According to the classical model, involuntary unemployment only increases when there is something impedi

Problem 1: a. Describe the concept of opportunity cost, using the production possibility curve. b. What are the fundamental problems of an economy? Describe how the command

regis is hungry for a snack. Here is the value he place on a cupcake: value of the first cupcake$5, value of the second cupcake $4, value of the third cupcake $3, and the value of

Variable and Total cost curve    * Consequently (from the table which is given): - MC initially decreases with increasing returns  0 through 4 units of output

What is meant by labor force?    In economics the labor force is the group of people who have a potential for being employed. Normally, the labor force having of everyone above