Question

In: Statistics and Probability

An auto insurance company classifies drivers as low risk if they are accident-free for one year....

An auto insurance company classifies drivers as low risk if they are accident-free for one year. Historically 98% of the drivers in the low-risk category for one year will remain in that category for the next year, and 78% of the drivers who are not low-risk one year will be in the low-risk category for the next year. (SHOW ALL YOUR WORK TO RECEIVE CREDIT)


A) Write a transition matrix with this information.


B) 90% of the drivers in a community are in the low-risk category this year. Write the initial probability vector for this community. Then determine the probability that a driver selected at random from the low-risk category will be in the low-risk category next year.


C) Determine the steady-state vector for this Markov Chain and determine the percentage of the drivers in the low risk category this year that will remain in the low risk category.

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Expert Solution

orchestra answered 1 year ago
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