#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
Around 2007, the world copper price was $2.00 per pound and 12 million metric tons per year was the quantity transacted. A) Assume copper’s demand elasticity is -.5 and supply elas


A firm is currently operating where the MC of the last unit produced = $84, and the MR of this unit = $70. What would you advise this firm to do?


Show that when a plane wave is transmitted through a thin lens of focal length f in the direction parallel to the optical axis of the lens, its converted into a paraboloid wave (th

True public goods are those goods which can't be provided to one group of consumers, without being provided to any other consumers who desire them. Thus they are "non-excludable."

causes and effect of the unemployment

Development Administration: Since the Government has been entrusted to manage economic and business activities, it was found difficult to manage the economic policy with the t

Over the course of modern American economic history there have been market failures, various social problems, and other complexities that have resulted in certain resource markets

Why do so many international markets tend towards oligopolist structure? Definition of oligopoly - few and large firms with market power Basic assumptions of oligopoly