#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
#1 explain with the aid of diagram the effect of an increase in demand for palm oil on the equilibrum position for palm kernel

Cost in the Long Run Cost minimization with the Varying Output Levels -A firm's expansion path shows minimum cost combinations of labor and capital at each level of output.


Hi, I am taking an economics course. I have a problem where I am given 2 types of units with the same production rate and the labor used to produce those units. I am supposed to c

Consider a two-period economy with a single commodity (say leisure): x1 is the con- sumption of leisure in period 1, and x2 is the consumption of leisure in period 2. When Peter ev

if the inverse demand curve is p=120-Qand the marginal cost is const ant at 10 ,

What mass (in grams) of O2 gas is present in a 36.0 L container at 673.0 K at 23.8 atm O2 pressure if the gas is ideal?

Privatisation in the narrow sense can take several forms: a) Total Denationalisation: This implies complete transfer of ownership of apublic enterprise to private hands. Some

KEYNES' THEORY AND EXPECTATIONS : Expectations played a major role in Keynes' theory of the determination of aggregate output and employment in market economies in the short run

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