insurance, #question.Question: Answer all parts (a, b, c, d, e & f). Consider the, Microeconomics

insurance, Microeconomics

Assignment Help:

#question.Question: Answer all parts (a, b, c, d, e & f).

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]

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages

insurance, Microeconomics

Related Discussions:- insurance

Explain tragedy of commons-tax incidence-elasticity, 1. Explain- a. Trag...

Define the price elasticity, Price elasticity is used in economics to deter...

Elementary theory of price formation: demand-supply analysis, ELEMENTARY TH...

Question, Briefly discuss the components of macroeconomics system with suit...

Foreign exchange markets, FOREIGN EXCHANGE MARKETS: A foreign exchange...

Open access regime , Open Access Regime Normal 0 fa...

Economics, What are the factors that producers in the society may take into...

Microeconomics, scope of microeconomics

Bains model of limit pricing., explain diagrammatically the bains model of ...

Choices , why is choice inevitable in the understanding of economics scienc...

Write Your Message!

Featured Services

Online Tutoring

Project Development

Exam Preparation

Course Help

Assignment Help

Popular Subjects

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT