3. Given: p = 10% r = $1,000 q = $5,000 What is the expected profit...

3. Given:

p = 10%

r = $1,000

q = $5,000

What is the expected profit of an insurance company from only healthy individuals?

Expert Solution

Expected profit from helathy individual is

**Here I am assuming the probability of getting sick of a healthy person is given as P = 10%, as you do not define p, r and q**

Expected profit to the insurance company from healthy individuals :

(1-p)*(r) + p*(r - q) = 0.9*1000 + 0.1*(-4000) = 900 - 400 = 500

Ans is $500.

Rahul Sunny answered 2 years ago

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