Microeconomics, Microeconomics

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: 4/22/2012 2:15:39 PM | 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
Explain the meaning of the statment "coffee and tea are close substitutes".

when does a buisness reach shutdown point

Question: i) Explain the main problems with government intervention. ii) Why and how do governments seek to control monopolies? iii) A country should specialise in the pr

Labor Total Output 1 30 2 50 3 60 4 75 5 80 a) If the price of the firm’s output is $12 per unit and the wage rate is $100 per worker, how many workers should the firm choose to

Q. Explain about Neoliberalism? Neoliberalism: A modern, harsher incarnation of capitalism that became dominant globally beginning in early 1980s, largely as a reaction to inte

Cost Function for Savings and Loan Industry * The empirical estimation of long run cost function can be useful in restructuring of the savings and loan industry in wake of savi

Which element of the periodic table has the most characteristics and is used in everyday life?

Within analysis of perfect competition, we distinguish between the short run and the long run on the basis that use of some input factors is fixed in the short run, but variable in

Introduction for a natural monopoly assignment

Consider a consumer with the following Cobb-Douglass utility function: U (x, y) = x α y 1-α a)  Find the Marshallian Demand for both goods. b)  Find the Price Elasticit