#question.Question: Answer all parts (a, b, c, d, e & f)., 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: 4/23/2012 8:33:09 AM | Location : United States







Related Discussions:- #question.Question: Answer all parts (a, b, c, d, e & f)., Assignment Help, Ask Question on #question.Question: Answer all parts (a, b, c, d, e & f)., Get Answer, Expert's Help, #question.Question: Answer all parts (a, b, c, d, e & f). Discussions

Write discussion on #question.Question: Answer all parts (a, b, c, d, e & f).
Your posts are moderated
Related Questions

What is the graph of the production possibilities frontiers for the American and Japanese economies if American worker can produce 10 tons of grain a year and Japanese worker can p

"In U.S., there is a culture of greeting people of the same sex. It's not common that people give attention to the people of the opposite sex. However, in the middle class, it's a

Economics; Different Perspective ? Economics is the knowledge of the choices taken by people who are faced with scarcity. ? Scarcity is a condition

Allocation Function The shifting or reallocation of production property into or out of markets based on shifts in prices for the products or services produced in that market.

Suppose that the price of schooling is $20 per year of schooling and it suddenly rises to $40. Compute the point price elasticity of demand at the initial price level and at the fi

what are the weaknes of consumer behaviour

why can methane not be prepared by this reaction

Definition and graph of centralized cartel

1.  National Marine Fisheries Service is considering closing a large area of federal waters to fishing in Alaska due to negative interactions of fishing with endangered Steller sea