1. Consider an insurance contract with the premium r=$200 and payout q=$800 a.) John has healthy-state income IH = $900 and sick-state income IS = $100. He has a probability of illness p = 0.2. Is the contract fair and/or full for John? b.) What is John’s expected income without this insurance contract? What is John’s expected income with this insurance contract?

1. Consider an insurance contract with the premium r=$200 and payout q=$800 a.) John has healthy-state income IH = $900 and sick-state income IS = $100. He has a probability of illness p = 0.2. Is the contract fair and/or full for John? b.) What is John’s expected income without this insurance contract? What is John’s expected income with this insurance contract?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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Consider an insurance contract with the premium r=$200 and payout q=$800. What is John’s expected income without this insurance contract? What is John’s expected income with this insurance contract?
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