Question

Do you know how to solve #3? 435 was wrong

Answer 1

We are given the following information

Probability of dying = 0.069941

Probability of not dying = 1 - 0.069941 = 0.930059

Life insurance pay = $12,000

Life insurance fee = $435

We are asked to find the expected value for the insurance company.

Let us create a contingency table to better understand the problem.

The company pays +$435-$12000 if the person dies.

The company gets $435 if the person doesn't die.

So, the expected value for the company is

`\begin{gathered} E(x)=0.069941\cdot(+\$435-\$12,000)+0.930059\cdot(+\$435) \\ E(x)=0.069941\cdot(-\$11,565)+0.930059\cdot(+\$435) \\ E(x)=-\$808.87+\$404.58 \\ E(x)=-\$404.29 \end{gathered}`

Therefore, the company's expectation is -$404.29

The negative value indicates that the company is most likely to lose money ($404.29) rather than get it.