You can insure a $27,000 diamond for its total value by paying apremium of D...

You can insure a $27,000 diamond for its total value by paying a premium of D dollars. If the probability of loss in a given year is estimated to be 0.01, what premium should the insurance company charge if it wants the expected gain to equal $1,000?

Expert Solution

x	D-27000	D
P	0.01	0.99

E(X) = (D - 27000) * 0.01 + D*0.99

1000 = 0.01D - 270 + D*0.99

1000 + 270 = D

D = $1270.

Hence Insurance company should charge $1270 to expect a gain equal to $1000.

orchestra answered 2 years ago

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