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.

a Peter has healthy-state income IH

= $500 and sick-state income IS

= $0. He has probability of illness p=0.1. Is the standard contract fair and/or full for Peter? If he ends up getting sick, what will his final income be?

b Tim has IH

= $500 and IS

= $0, but a probability of illness p = 0.2, higher than Peter’s. Is the standard contract fair and/or full for Tim? How does purchasing the standard contract affect Tim’s expected income?

c Jay has IH

=$1,