Question

Given

I_S  = $2,000

I_H = $7,000

E(I) = $6,500

what is the probability of getting sick (p)?

90%

100%

1%

10%

not enough information given

In addition to the question above assume a health insurance policy that has these values:

r = $500

q = $5,000

we can say that

this policy is partial insurance

this policy is full insurance

this policy is more than full

not enough information to determine

none of the above

Answer 1

Income when person is sick, IS = $2,000

Income when person is healthy, IH = $7,000

Expected income, E(I) = $6,500

(1) E(I) = p*IS + (1 - p)*IH; where p is the probability of getting sick. We are supposed to find the value of p.

On putting in the values, we get,

6500 = 2000*p + 7000*(1-p)

6500 = 7000 - 5000*p

5000p = 500

p = 500/5000 = 0.1 = 10%

So, correct option is (d) 10%

(2) With health insurance policy of premium, r = $500 and return, q = $5,000

Clearly the loss in income when person falls sick = 7000 - 2000 = $5,000

The person gets back or coverage of this entire amount. Thus, we can sat that the policy is full insurance. So correct option is (b) this policy is full insurance.