Answer to Question #91754 in Microeconomics for neeraj

Question #91754
Tina has an income of $70,000 with a health probability of 80%. Her medical expenses during sickness are fully paid by insurance which is usually $2000. What will be the actuarially fair premium tina should pay?
1
Expert's answer
2019-07-17T09:49:55-0400

Therefore actuarially fair premium is equal to expected costs, which are calculatedas EC=p*(loss of income if sick)+(1-p)(loss of income when healthy)

In this case actuarially fair premium = (0.2X2000) + (0.8X0)

= $400

(in percentage terms actuarially fair premium is equal to probability of sickness= 20%)


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