SOLUTION: An insurance policy covers a $20,000 sapphire ring against theft and loss. If it is stolen then the insurance company will pay the policy owner in full. If it is lost then they wil

Algebra ->  Probability-and-statistics -> SOLUTION: An insurance policy covers a $20,000 sapphire ring against theft and loss. If it is stolen then the insurance company will pay the policy owner in full. If it is lost then they wil      Log On


   

Question 1189205: An insurance policy covers a $20,000 sapphire ring against theft and loss. If it is stolen then the insurance company will pay the policy owner in full. If it is lost then they will pay the owner $8000 . From past experience, the insurance company knows that the probability of theft is 0.0025 and of being lost is 0.03. How much should the company charge to cover the ring if they want a expected return?
I understand and know that on average they charge $290. How do I get the full amount using that?
Answer by Boreal(15235) About Me  (Show Source):
You can put this solution on YOUR website!
Theft expectation is $20000*0.0025=$50 negative for the company (X*p(X))
Being lost is $8000*0.03=$240 negative for the company.
The negative expectation of the company is $290.
If they charge a premium of $290, the expectation is that they will break even.