Great Benefit Is a Health Insurance Company with Two Types

Essay

Great Benefit is a health insurance company with two types of customers: healthy persons and sickly persons.A healthy person has 1-to-5 odds of getting ill,and a sickly person has 1-to-1 odds of getting ill.However,the insurance company cannot distinguish between healthy and sickly persons.Brett is a risk-averse person who purchases health insurance from Great Benefit.Without insurance,Brett's income will be $8,000 if he remains healthy and $2,000 if he becomes ill.Brett's situation is diagrammed below.