Dismiss Notice
Join Physics Forums Today!
The friendliest, high quality science and math community on the planet! Everyone who loves science is here!

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


    User Avatar
    Staff Emeritus
    Science Advisor
    Gold Member

    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.
Share this great discussion with others via Reddit, Google+, Twitter, or Facebook