competitive equilibrium - Solution to Questions A The...

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Solution to Questions A) The definitions of the competitive equilibrium. Why every contract offered in equilibrium must earn zero expected profit. Competitive equilibrium is also called the Walrasian equilibrium, which is the traditional concept for gauging the economic equilibrium, right and suitable for making analysis of the commodity markets with prices which are flexible and has many traders as well. It serves as the benchmark of efficiency in the analysis of the economy of the commodity of the market. It depends on the crucially on the assumptions of the environment which is competitive where every trader decides on the quantity that is so minimal as compared to the total quantity which is traded in a given market that their personal transactions have got no influence on the prices set. The competitive markets are good ad suitable standard by which other structures of the market are evaluated. Why every contract offered in equilibrium must earn zero expected profit. The people population is the loss risk that is of, properly, life, income, health etc. Take for instance the accident insurance example. The wealth where that accident hardly occur is w>0 If the accident happens the loss of wealth is L (0<L<w). The utility of the wealth level is w: u (w)* u is C 2 , strictly increasing and strictly concave. According to this, there to types of the individuals: High risk: probability of the accident is about ph Low risk: probability of the accident is Pl (0<PL<PH). The proportion of H in the population of λ€ (0,1) (B) Suppose that the information is symmetric and void. Derive the equilibrium contracts
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Equilibrium is given by Ph*PI/risk. This is the formula of the equilibrium defined as the condition by which all the competing influences get offset, in large amount . In this given
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