#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
elasticity of demand

Why do demand curves generally slope downward?  The demand curve slopes downward because in general, the higher the price of the good, the fewer people will need to buy it.

Economic Development The word development is from the Latin root ‘Voloper’ which meant wrap up, envelop. The English used this word along with ‘des’ meaning ‘undo’. The word

Questions (i)   You are an industry analyst. Last year, the production cost of Microprocessor increased remarkably due to labor unionization. Nevertheless, the industry experie

how microeconomic issues maybe represented using production posibility curve

EXCHANGE RATE SYSTEM: It is interesting to look at a case study of a country like India for several reasons: first it is a small country in terms of imports and exports as a p

Transport Infrastructure: The development of transport infrastructure plays an important role in the growth process through increasing mobility of resources and increasing fac

Fiat money is what is regular in modern economic systems.  Fiat money is money that is described as legal tender by either a government or some organization with the authority to e

Production having Two Outputs -Economies of Scope *  Economies of scope exist when joint output of a single firm is greater than the output which could be achieved by two diffe

Price/Earnings (P/E) Ratio This is a measure of an organization investment potential. Literally, a P/E ratio is how much a share is worth per dollar of earnings. The price-earn