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
Fiat money is what is regular in modern economic systems.  Fiat money is money that is described as legal tender by either a government or some organization with the authority to e

price falls and demand is elstic

Figure 3.7 in the above textbook. Using the figure in guide, determine the approximate size of the market surplus or shortage that would exist at a glance of a) $40 b) $20

application of indifference curve analysis to the problem of exchange

INFO: Suppose that a firm is currently employing 20 workers,(the only variable input), at a wage rate of $60. The average product of labor is $30, the last worker added 12 units to

What does the basic neoclassical, or traditional, model of economics assume about markets? It supposes that markets are perfectly competitive and smoothly functioning, and thos

THEORY OF PRODUCTION: Production activities related to goods and services require inputs. Typically, the set of inputs includes labour, capital equipments and raw materials. T


Infrastructure : Infrastructure plays an important role in the development of an economy. The adequacy or lack of it determines an economy's success or failure in increasing p

1. Assume that the market for wheat is perfectly competitive. Suppose the demand curve for wheat is given by: QD = 200 – 2P where QD is the quantity demanded, in bushels, and P i