Adverse SelectionSuppose that half the population is considered healthy and the other half isconsidered unhealthy. If an insured healthy person gets sick, the full cost to theinsurance company is $1,000. If an insured unhealthy person gets sick, the cost tothe insurance company is $10,000.In a given period, a person has a 40% chance of getting sick, regardless of healthy orunhealthy.People know whether they are healthy or unhealthy but the insurance company doesnot.The insurance company offers full coverage of all medical expenses and fairinsurance contracts to all its customers at the same price, regardless of health type(i.e., the insurance company makes an expected profit of zero).If everyone purchases insurance, what is the insurance premium (i.e., price of theinsurance policy offered)?HINT: The insurance company makes expected profits of zero. First, find theexpected cost to the insurance company from a customer (i.e., similar to calculatingexpected value but with cost). Since the insurance company makes an expectedprofit of zero, the price = expected cost.Important points to remember:1) Half the population is healthy and half is unhealthy. They have different costs tothe firm.2) Each person only has 40% chance of getting sick (OR 40% of the population isexpected to get sick) regardless of health type.2,3252,4502,2002,100

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Description: Adverse SelectionSuppose that half the population is considered healthy and the other half isconsidered unhealthy. If an insured healthy person gets sick, the full cost to theinsurance company is $1,000. If an insured unhealthy person gets sick, the

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Adverse Selection Suppose that half the population is considered healthy and the other half is considered unhealthy. If an insured healthy person gets sick, the full cost to the insurance company is $1,000. If an insured unhealthy person gets sick, the cost to the insurance company is $10,000. In a given period, a person has a 40% chance of getting sick, regardless of healthy or unhealthy. People know whether they are healthy or unhealthy but the insurance company does not.

Adverse Selection Suppose that half the population is considered healthy and the other half is considered unhealthy. If an insured healthy person gets sick, the full cost to the insurance company is $1,000. If an insured unhealthy person gets sick, the cost to the insurance company is $10,000. In a given period, a person has a 40% chance of getting sick, regardless of healthy or unhealthy. People know whether they are healthy or unhealthy but the insurance company does not.

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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