Question

In: Statistics and Probability

An automobile insurance company estimates the following loss probabilities for the next year on a $20,000...

An automobile insurance company estimates the following loss probabilities for the next year on a $20,000 sports car:

Total Loss: .001

50% Loss: .01

20% Loss: .05

If the company charges $850 annual premium for this car, how much is the company's expected gain per policy?

X P(X) x. P(x)
D
D-
Sum

My professor wants the answer in the table above (if possible). I am unsure on how to answer this.

Solutions

Expert Solution

suppose X is loss without considering premium

X P(X) xP(X)
20000 0.001 20
10000 0.01 100
4000 0.05 200
0 0.939 0
1 320

Expected value of X =

= 320

hence

Expected gain if premium = 850 is 850 - 320 = 530  

orchestra answered 3 years ago
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