Question
Alex faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $10. Mitch also faces a
Alex faces a 50% chance of having a loss of $0 and a 50% chance of having a loss of $10. Mitch also faces a 75% chance of having a loss of $0 and a 25% chance of having a
loss of $20.Dan faces a 75% chance of having a loss of $0 and a 25% chance of having a loss of $24
a. What is the actuarially fair premium (AFP) for Alex and Mitch? (1 point)
b. What is the actuarially fair premium (AFP) for Dan? (1 point)
c. If Dan is added to the risk pool for insurance with Alex and Mitch, what would the expected loss (p*) be? (1 point)
d. If the insurer charges all of them a price of $5, is that price a good deal for each of them? Why or why not? (hint- think about the AFP for each) (2 points)
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