Expected Value Problem

  • Thread starter don_anon25
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  • #1
don_anon25
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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

85000(.001)+42500(.01)

Any help is greatly appreciated!
 
Last edited:

Answers and Replies

  • #2
Hurkyl
Staff Emeritus
Science Advisor
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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!
 
  • #3
robert Ihnot
1,059
1
don anon 25: 85000(.001)+42500(.01)=?

That seems like a reasonable start.
 

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