Suppose that half the population is considered healthy and the other half is considered unhealthy. If an insured healthy person gets sick, the full cost to the insurance company is $1,000. If an insured unhealthy person gets sick, the cost to the insurance company is $10,000. In a given period, a person has a 40% chance of getting sick, regardless of healthy or unheahy. People know whether they are healthy or unhealthy but the insurance company does not. The insurance company offers full coverage of all medical expenses and fair insurance contracts to all its customers at the same price, regardless of health type (i.e., the insurance company makes an expected profit of zero). If everyone purchases insurance, what is the insurance premium (i.e., price of the insurance policy offered)? HINT: The insurance company makes expected profits of zero. First, find the expected cost to the insurance company from a customer (i.e., similar to calculating expected value but with cost). Since the insurance company makes an expected profit of zero, the price = expected cost. Important points to remember: 1) Half the population is healthy and half is unhealthy. They have different costs to the firm. 2) Each person only has 40% chance of getting sick (OR 40% of the population is expected to get sick) regardless of health type