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.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.5P

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