#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
Boltzmann Distribution: In most cases of interest of chemistry the particles adopt the Boltzmann distribution. Qualitative considerations: the general expression for W given by eq

Time is a significant determinant of price elasticity.  If a price changes, it might take consumers a certain amount of time to discover alternative lifestyles or commodities to ac

Three People choose whether to contribute a fixed amount toward the provision of a public good. This good is provided if and only if at least two of them contribute. If it is not p

Consider the following linear program in primal form and develop the dual formulation in a detailed manner. Use matrix notation in developing the dual. Clearly express all the dual

The Efficiency of a Competitive Market *? When an competitive markets generate an inefficient allocation of the resources or market failure?   1) Externalities Costs

under which market structure does the banking sector fall?

What caused the productivity slowdown?  Observers have pointed to 4 factors--Oil prices, baby boom, increased problems of economic measurement and environmental protection expe

Q. Show the method of applying a discount? The method of applying a discount rate to convert future monetary amounts to their equivalent value in today's terms, based on the pr