You believe that next year there is a 50% probability that your healthcare cost
ID: 1099639 • Letter: Y
Question
You believe that next year there is a 50% probability that your healthcare cost will be $5,000 but your spouse believes you willa ll be healthy and there will be no healthcare cost; however, you both agree to buy an annual health insurance plan. An Internet site makes you believe people in your age group and with similar family size will spend $4,000 with 30% probability or $3,600 with 20% propbability. You decided to make a "scientific decision" and look for a health insurance policy where the annual premium will not exceed your expected premium. What is your expected annual premium? (Please show work).
Explanation / Answer
expected annual premium = 50% * 5000 + 30% * 4000 + 20% * 3600
= 4420
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