Now consider a different insurance company that does not have the inclination to tailor contracts specifically to individuals. Instead, it will offer a “standard contract” with the premium r= $100 and payout q=$500 to anyone who will purchase it.
c) Jay has IH = $1,000 and Is = $0, with probability of illness p = 0.2. Is the standard contract fair. or full for Jay? and also graph the policy and label the locations and values of IH , IS , E(I), IH’ , IS’
d) Suppose there is a customer named Ronald for whom the standard contract is partial and actuarially unfair in the insurance company’s favor. Give a set of possible values for Ronald’s IH, Is, and p. recall that we always assume IH > Is. And also graph the policy and label the locations and values of IH , IS , E(I), IH’ , IS’.
f) True or false: if we assume all four individuals are risk-averse, then we that Tim has the most to gain by taking up the contract. Justify your answer