Question

Marciel is considering buying a flood insurance policy for the upcoming year that costs 600 dollars and is worth 50,000 dollars if her home floods. Based on previous years, she estimates that there is a 2% chance of her home flooding this year. Is the "Expected Value" $800.00?

Answer 1

The probability given is

`\begin{gathered} 50000-600=49400 \\ Pr(x=49,400)=2\%=0.02 \\ Pr(x=-600)=(100-2)\%=98\%=0.98 \end{gathered}`

Therefore,

The expected value of buying this insurance policy will be given below as

`\begin{gathered} (49400*0.02)+(-600*0.98) \\ =988-588 \\ =400 \end{gathered}`

Hence,

The final answer is

`\Rightarrow\text{ \$}400\text{ }`