Suppose Ralph’s probability of getting sick is 0.6. If Ralph gets sick, his inco

Question

Suppose Ralph’s probability of getting sick is 0.6. If Ralph gets sick, his income will be IS=$10,000. If Ralph stays healthy, his income will be IH=$50,000. State what Ralph’s insurance premium (r) and payout (q) will be under each type of insurance.
[Hint: Where appropriate, you can respond using inequalities]

a.) What will Ralph’s insurance premium (r) and payout (q) be under an insurance plan that is fair and full?

b.) What will be true of Ralph’s payout (q) under an insurance plan that is fair but partial? c.) What will be true of Ralph’s premium (r) under an insurance plan that is full but unfair?

Explanation / Answer

1.a.) An insurance that is fair and full Insurance premium (r)10,000×0.6=$6,000

Payout (q)40,0006,000=$34,0002.

b.) An insurance plan that fair but partial Insurance premium (r)10,0006,000=$4,000

Payout (q)50,000×0.6=$30,0003.

c.) An insurance plan that is full but unfair Insurance premium (r)4,000+6,000=$10,000

Payout (q)30,000+34,000=$64,000

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