SOLUTION: uppose 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 $50, with prob
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Question 1100878: uppose 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 $50, with probability 0.01 the pot will need to be replaced and it will cost $200. Your boss wants the insurance policy to generate $9 of expected profit. What should be the price of the insurance policy?
Answer by stanbon(75887) (Show Source): You can put this solution on YOUR website!
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 $50, with probability 0.01 the pot will need to be replaced and it will cost $200. Your boss wants the insurance policy to generate $9 of expected profit. What should be the price of the insurance policy?
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Let expected gain be $9
Let the premium price be "x"
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Random gain::: (50-x).....(200-x).....(250-x)....x
Probabilities:...0.02.......0.01......0.0002....0.9698
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0.02(50-x)+0.01(200-x)+0.0002(250-x)+0.9698x = 9
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1-0.02x+2-0.01x+0.05-0.0002x+0.9698x = 9
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5.95 = 0.9396x
x = $6.33
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Cheers,
Stan H.
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