4. Suppose that an insurance company charges $1150 per year to cover a car in a...

4.   Suppose that an insurance company charges $1150 per year to cover a car in a nearby city. Suppose that there are three different scenarios that the company has to consider:
a.   There is a .0005 probability that the policy holder will cause a fatality and the company will pay $1,000,000.
b.   There is a .01 probability that the policy holder will injure someone and the company will pay $20,000.
c.   There is a .1 probability that the policy holder will be in an accident and the company will pay $2,000.
What is the expected value for the policy and is it wise for the company to continue to offer it?

Solutions

Expert Solution

SOLUTION:

From given data,

( 4.) Suppose that an insurance company charges $1150 per year to cover a car in a nearby city. Suppose that there are three different scenarios that the company has to consider:

a.   There is a .0005 probability that the policy holder will cause a fatality and the company will pay $1,000,000.
b.   There is a .01 probability that the policy holder will injure someone and the company will pay $20,000.
c.   There is a .1 probability that the policy holder will be in an accident and the company will pay $2,000.

What is the expected value for the policy and is it wise for the company to continue to offer it

Expected value for the company = $1150 - (0.0005 x $1000000) - (0.01 x $20000) - (0.10 x $2000)

= 1150 - 500 - 200 - 200

= $250

Since the expected value for the company is positive, it is wise for the company to continue to offer it.

orchestra answered 1 year ago

Next > < Previous

Related Solutions

Suppose that an insurance company offers to pay you an annuity of $5,000 per year for...

Suppose that an insurance company offers to pay you an annuity of $5,000 per year for 5 years in exchange for $16,000 today. What is the return in this investment measured in percentage terms ? ( This is an ordinary annuity. Round to two decimal places. )

1) A 1150 kg car drives along a city street at 27.0 miles per hour (12.1...

1) A 1150 kg car drives along a city street at 27.0 miles per hour (12.1 m/s). What speed must the 0.142 kg baseball have if its momentum is to be equal in magnitude to that of a car? (answer must be in m/s) 2) Two air-track carts move toward one another on an air track. Cart 1 has a mass of 0.32 kg and a speed of 1.4 m/s. Cart 2 has a mass of 0.68 kg. A)...

Suppose a company charges an annual premium of $100 for an insurance policy for minor injuries....

Suppose a company charges an annual premium of $100 for an insurance policy for minor injuries. Actuarial studies show that in case of an injury claim, the company will pay out an average of $900 for outpatient care and an average of $3000 for an overnight stay in the hospital.They also determine that, on average, each year there are five claims made that result in outpatient care for every 1000 policies and three claims made that result in an overnight...

Suppose a car insurance company sells you an insurance policy that “gets you legal” and costs...

Suppose a car insurance company sells you an insurance policy that “gets you legal” and costs $7.50 per month. What is the problem with this insurance policy? What does it mean to have only 25/50/25 liability coverage for the following situations (what could the insurance company pay)? a. If you hit someone (you are at fault)? b. If someone hits you (they are at fault) and is insured? c. If someone hits you (they are at fault) and is not...

Suppose that BYOB charges $2.50 per can

Profit maximization and loss minimization BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville. Suppose that BYOB cannot price discriminate; that is, it sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) for beer in this market. Place the black point (plus symbol) on the graph to indicate the profit-maximizing price...

An insurance company charges a 21-year-old male a premium of $500 for a one-year $ 100...

An insurance company charges a 21-year-old male a premium of $500 for a one-year $ 100 comma 000 life insurance policy. A 21-year-old male has a 0.9985 probability of living for a year. a. From the perspective of a 21-year-old male (or his estate), what are the values of the two different outcomes? The value if he lives is nothing dollars. The value if he dies is nothing dollars. b. What is the expected value for a 21-year-old male who...

1. The movie distributor charges a movie theatre $4 per ticket to rent a movie. Suppose...

1. The movie distributor charges a movie theatre $4 per ticket to rent a movie. Suppose the theatre can seat a maximum of 200 people. The demand for the movie is different for the afternoon showing and for the evening showing. Based on the demand function P = 10 – Q/10 for the afternoon showing and P = 20 – Q/10 for the evening showing, the marginal-revenue function for the afternoon is MR = 10 – Q/5 and for the...

18) Suppose a local swimming pool either charges $10 per person (per visit) OR charges a...

18) Suppose a local swimming pool either charges $10 per person (per visit) OR charges a reduced price of $5 per person (per visit) if that person has an annual membership. The annual membership costs $50. Next, assume John preferences are formed such that he values trips to the swimming pool in the following manner: his first visit is valued at $20 and each subsequent visit is worth $1 less ($19 for visit #2, $18 for visit #3, #1 for...

A car insurance company has determined that 10% of drivers were involved in a car accident last year.

A car insurance company has determined that 10% of drivers were involved in a car accident last year. If 3 drivers are randomly selected, what is the probability of getting: a) one driver involved in a car accident last year? P(x = 1) = b) fewer than two drivers who were involved in a car accident last year? P(x2)=

A car insurance company has determined that the mean annual car insurance cost for a family...

A car insurance company has determined that the mean annual car insurance cost for a family in the town of Watlington is $1716. A researcher wants to perform a hypothesis test to determine whether the mean insurance cost for a family in the town of Putford is higher than this. The mean insurance cost for a random sample of 32 families in Putford was $1761. At the 10% significance level, do the data provide sufficient evidence to conclude that the...

Subjects