Suppose you are interested in insuring a car video system for$2,000 against theft. An insurance...

Suppose you are interested in insuring a car video system for $2,000 against theft. An insurance company charges a premium of $225 for coverage for 1 year, claiming an empirically determined probability of 0.1 that the system will be stolen some time during the year.What is your expected return from the insurance company if you take out this insurance?

Expert Solution

Cost for insurance = $225

Loss for insurance company if theft happen = 2000 - 225 = 1775 with probability 0.1

Profit for insurance company if theft doesn't happen = 225 with probability (1 - 0.1)

So,

E(x) = 225 * (1 - 0.1) - 1775 * 0.1 = $25

Hence expected return for insurance company is $25 if I take out this insurance.

orchestra answered 2 years ago

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