Suppose there is a 5% probability (or risk) that you will get a very severe flu...

Suppose there is a 5% probability (or risk) that you will get a very severe flu next year. If you get the flu, you will be admitted to the Hospital for at least a week, and in turn you will need to pay $2,000 for a hospital service and medical expenses. Keep in mind that you are risk-averse. While you can’t avoid getting the flu, you can avoid a financial loss due to the flu by buying a health insurance. You were looking for a health insurance with a price equal to your expected financial lose. The price of insurance is called actuarially fair insurance premium.

Question 1. What would the actuarially fair insurance premium (or expected financial lose) be? Make sure to calculate the actuarially fair insurance premium. Show how you calculated the actuarially fair insurance premium.

Expert Solution

Actuarially fair insurance premium = loss* probability of bad state

= 2000*.05

= $ 100 . Answer

Actuarially fair insurance leaves the expected Consumption in both states same.

Rahul Sunny answered 2 years ago

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Suppose there is a 5% probability (or risk) that you will get a very severe flu...

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Related Solutions

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