SOLUTION: Suppose you set insurance prices for an insurance company. The insured object is a Dutch oven. With probability 0.02 the lid will need to be replaced and it will cost $150, with pr

Question 1075448: Suppose you set insurance prices for an insurance company. The insured object is a Dutch oven. With probability 0.02 the lid will need to be replaced and it will cost $150, with probability 0.01 the pot will need to be replaced and it will cost $400. Your boss wants the insurance policy to generate $9 of expected profit. What should be the price of the insurance policy?
Answer by jorel1380(3719) (Show Source): You can put this solution on YOUR website!
First, calculate the expected cost.
.02 x 150=3 +
.01 x 400=4
Expected cost:$7
7+9(profit)=$16 as the optimum price for the policy. ☺☺☺☺
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