Consider an insurance market where 75% of the potential insured population have an expected loss of $200 and the remaining 25% have an expected loss of $X. The actuarially fair price for insurance among this group is $650.

a) What does 'actuarially fair price' mean? What is X? Show your work.

b) Say that the price was set at $650 and the insurers end up with an 'adverse selection' of customers. What does that mean and why might it happen?