Answer to Question #91754 in Microeconomics for neeraj

Question

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?

Answer 1

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%)