Microeconomics, 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: 4/20/2012 5:28:52 AM | Location : United States







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

Write discussion on Microeconomics
Your posts are moderated
Related Questions
Estimating the Educational Structure of the Labour Force in the Economy for the Target Year The educational levels of persons within each occupational structure for the base y

In fall 2006, Pace University raised its annual tuition from $24,750 to $29,750. Freshman enrollment declined from 1500 in fall 2005 to 1110 in 2006. assuming the demand curve did


EMPLOYMENT AND UNEMPLOYMENT POLICY: Engagement of a person in any economic activity is central to the concept of identifying a worker. A worker is one who participates in any

It is also known a sleadig indicators forecasting National Bureau of Economic Research of U. S.A has identified three types of indicate Leading indicators coincidental indicators a

1.      How can a nation and its producers determine whether or not it has a comparative advantage in producing a particular good or service? a 2.  The above figure show

What is the role of profits in a market economy? Profits act as an incentive to producers and potential entrepreneurs, and also as a signal to both that resources may be re-al

Explain about the content of factor markets and the distribution of income. Content of factor markets and the distribution of income: a. Factor distribution of income b.

1.what is price mechanism? 2.how does price mechanism benefit an echonomy. 3.what are the characteristics of a centrally planned economy?

If one person can produce 1 fish and 10 oranges per hour and works 5 hours a day.another person can produce 2 fish and 20 oranges per 2 hors and works 8 hurs a day then who has the