SOLUTION: Suppose you set insurance prices for an insurance company. The insured object is an oven. With probability of 0.02 the lid will have to be replaced and it will cost $150, with prob
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Question 1075605: Suppose you set insurance prices for an insurance company. The insured object is an oven. With probability of 0.02 the lid will have to be replaced and it will cost $150, with probability of 0.01 the pot will need to be replaced and it will cost $400. The boss wants to generate $9 of expected profit. What should be the price of the insurance policy? Answer by Boreal(15235) (Show Source):
You can put this solution on YOUR website! E(x)=9=-0.02(150)-0.01(400)+0.97(price)
9=-3-4+0.97*P
0.97P=$16
P=16.49, rounded down or $16.50 rounded up.
Check
400 ovens
expected profit of $3600
Insurance policy premium is $6600*(0.97)=$6402
4 pots ($1600)
8 lids ($1200)
