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A potential customer for an 85000 dollar fire insurance policy possesses a home in an area that according to experience, may sustain a total loss in a given year with probability of .001 and a 50% loss with probability .01. Ignoring all other partial losses, what premium shoud the insurance company charge for a yearly policy in order to break even on all 85000 dollar policies in this area?

Here's what I wrote down from the problem:

p(Y=-85000) = .001 probability of total loss...that is, loss in amount of 85,000

p(Y=-42500) = .01 probability of 50% loss...loss in the amoung of 42500

85000(.001)+42500(.01)

Any help is greatly appreciated!

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# Homework Help: Expected Value Problem

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