Finky faces a 80% chance of having a loss of $0 and a 20% chance of having a loss of $10.
Mitch also faces a 80% chance of having a loss of $0 and a 20% chance of having a loss of $10.
Dan faces a 80% chance of having a loss of $0 and a 20% chance of having a loss of $20
a. What is the actuarially fair premium (AFP) for Finky and Mitch?
b. What is the actuarially fair premium (AFP) for Dan?
c. If Dan is added to the risk pool for insurance, what would the expected loss (p*) be?
d. Explain if the pool is still homogeneous or not.
e. If the insurer charges all of them a price of $3, is that price a good deal for each of them? Why or why not? (hint - think about the AFP for each)