An insurance company offers a "standard contract" to employees of a company with a premium of $200 and payout of $1,000 to anyone who will purchase it. John has a probability of illness of p=0.1. If John were to purchase the standard contract, would the contract be considered actuarially fair? A. No, because John's expected value of $100 would be less than the premium rate of $200. B. No, because John's expected value of $800 is greater than the premium of $200. C. Yes, because John's expected value of $100 would be less than the premium rate of $200. D. Yes, because John's expected value of $800 is greater than the premium of $200.
An insurance company offers a "standard contract" to employees of a company with a premium of $200 and payout of $1,000 to anyone who will purchase it. John has a probability of illness of p=0.1. If John were to purchase the standard contract, would the contract be considered actuarially fair? A. No, because John's expected value of $100 would be less than the premium rate of $200. B. No, because John's expected value of $800 is greater than the premium of $200. C. Yes, because John's expected value of $100 would be less than the premium rate of $200. D. Yes, because John's expected value of $800 is greater than the premium of $200.
Chapter18: Asymmetric Information
Section: Chapter Questions
Problem 18.5P
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![An insurance company offers a "standard contract" to employees of a company with a premium of $200 and payout of
$1,000 to anyone who will purchase it. John has a probability of illness of p=0.1. If John were to purchase the standard
contract, would the contract be considered actuarially fair? A. No, because John's expected value of $100 would be less
than the premium rate of $200. B. No, because John's expected value of $800 is greater than the premium of $200. C.
Yes, because John's expected value of $100 would be less than the premium rate of $200. D. Yes, because John's
expected value of $800 is greater than the premium of $200.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F44cbd558-9ba7-455c-8c84-34f9f755c395%2Fcfa94d83-a142-4c88-8114-51e0fecff101%2Fkn4k6nfo_processed.jpeg&w=3840&q=75)
Transcribed Image Text:An insurance company offers a "standard contract" to employees of a company with a premium of $200 and payout of
$1,000 to anyone who will purchase it. John has a probability of illness of p=0.1. If John were to purchase the standard
contract, would the contract be considered actuarially fair? A. No, because John's expected value of $100 would be less
than the premium rate of $200. B. No, because John's expected value of $800 is greater than the premium of $200. C.
Yes, because John's expected value of $100 would be less than the premium rate of $200. D. Yes, because John's
expected value of $800 is greater than the premium of $200.
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