Expected Value Problem

You're calculating the expected value of the loss, which is the amount the insurance company would need to charge in premiums in order to break even on all 85000 dollar policies in the given area. This is a good start, but you'll need to do some more calculations to get to the final answer. It may be helpful to review the formulas for expected value and probability. In summary, you need to calculate the expected value of the loss in order to determine the premium that the insurance company should charge for a yearly policy in order to break even on all 85000 dollar policies in the given area.
  • #1
don_anon25
36
0
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:
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  • #2
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
don anon 25: 85000(.001)+42500(.01)=?

That seems like a reasonable start.
 

1. What is the expected value problem?

The expected value problem is a concept in probability theory that calculates the average outcome of a random event over a large number of trials. It is used to make predictions about the likelihood of future outcomes based on past data.

2. How is the expected value problem calculated?

The expected value is calculated by multiplying each possible outcome by its probability and then summing all of these values together. This can be represented mathematically as: E(x) = x1p1 + x2p2 + ... + xnpn, where x represents the possible outcomes and p represents their probabilities.

3. What is the significance of the expected value in decision making?

The expected value is an important tool in decision making as it helps to quantify the potential outcomes of different choices and weigh their probabilities. It allows individuals to make informed decisions based on the most likely outcome.

4. What are some real-life applications of the expected value problem?

The expected value problem has many practical applications in fields such as finance, insurance, and game theory. For example, it can be used to calculate the expected return on investments, determine insurance premiums, and make strategic decisions in games of chance.

5. Can the expected value problem be used to predict the exact outcome of a single trial?

No, the expected value is meant to represent the average outcome over a large number of trials. It cannot be used to predict the exact outcome of a single trial as probability involves randomness and uncertainty.

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