#question.Question: Answer all parts (a, b, c, d, e , 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 2:48:48 AM | Location : United States

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

Write discussion on #question.Question: Answer all parts (a, b, c, d, e
Your posts are moderated
Related Questions
when the demand function is 2Q-24+3P=0,find the marginal revenue when Q=3.

Business Executives and Choice of Risk *  Example - Study of 464 executives found that: 20% persons were risk neutral 40% persons were risk takers 20% perso

Explain the difference between a stock and a flow.   A stock is something whose quantity is calculated at a point in time, whereas a flow measures the quantity of something ove

graphical illustration describing the influence of an increase in immigrants on the market supply of labour

explain the relationship between scarcity,choice and opportunity cost

how to write an half equation

Explain inflation, and the difference between anticipated and unanticipated inflation.         Answer   Inflation is the persistent rise in the general price level in the e