SOLUTION: A race-car driver wishes to insure his car for the racing season for $50,000. the insurance company estimates a total loss may occur with probability 0.002, a 50% loss with probab

Question 549735: A race-car driver wishes to insure his car for the racing season for $50,000. the insurance company estimates a total loss may occur with probability 0.002, a 50% loss with probability 0.01, and a 25% loss with probability 0.1, ignoring all other partial losses, what premium should the insurance company charge each season to realize an average profit of $500?
Answer by Theo(13342) (Show Source): You can put this solution on YOUR website!
he should charge 2100 per season.
if the averages hold, he should expect to pay out each season.
.002 * 50,000 * 1 = 100.
.01 * 50,000 * .5 = 250
.1 * 50,000 * .25 = 1250
on the average, he will be paying out 1250 + 250 + 100 = 1600 per season.
he collects 2100.
he nets 500.

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