An insurance company estimates the probability of an earthquakein the next year to be 0.0014....

An insurance company estimates the probability of an earthquake in the next year to be 0.0014. They estimate the average damage done by an earthquake to be $60,000. The company offers earthquake insurance for $100 per year, and when damage occurs, the company pays the full price to the customer. Suppose you are working for the company and want to plan for their future finicalness.

A. What is the expected value of the insurance company's pay out to a customer in a year?

B. What is the expected value of the insurance company's profit from each customer in a year?

Expert Solution

A)

expected value of insurance company's pay out to a customer

= 60000 * 0.0014

= 84

B) expected value of the insurance company's profit from each customer in a year

= 100 - 84

= 16

orchestra answered 2 years ago

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