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
Average Total Cost (ATC): ATC is the total cost per unit of output. ATC = TC/y = (TFC + TVC)/y = AFC +AVC ATC falls sharply at the beginning of the production process because

Marginal Revenue, Marginal Cost & Profit Maximization * Determining profit maximizing level of output - Profit (π ) = Total Revenue - Total Cost - Total Revenue (R) = Pq

how pp curve can solve the central problems of an economy?

Question 1: (a) The Mauritian government is now increasingly involving the private sector in the development of the economy. How can government support effective private secto

Factors that calculate price elasticity of demand: The proportion of Income spent on the Commodity If the price of a good is relatively low such the expenditure on it is a

Human numbers grew as the population after 1800 After 1800, human numbers grew as the population explosion took hold. It carried our entire population to 6 billion in October 1


elasticity concept in policy formulation

technological advance reduced the cost of computer chips . explain using the demand and supply diagrams , how the the following markkets are affected in terms of price and quantiti

Substitution Effect -  The  substitution effect is change in an item's consumption associated with the change in the price of the item, level of utility held constant. -  Wh