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Expected Value Problem

  1. Sep 25, 2005 #1
    Here goes:

    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


    Any help is greatly appreciated!
    Last edited: Sep 25, 2005
  2. jcsd
  3. Sep 25, 2005 #2


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    Well, we can't know where you need help unless you show us what you've done on the problem so that we know where you're stuck!
  4. Oct 1, 2005 #3
    don anon 25: 85000(.001)+42500(.01)=?

    That seems like a reasonable start.
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