Question

An insurance company estimates the probability of an earthquake in the next

year to be 0.0012. The average damage done by an earthquake it estimates to be
$60,000. If the company offers earthquake insurance for $100, what is their expected
value of the policy?

Answer 1

- 27.88

Explanation:

Probability of earthquake = 0.0012

P(earthquake). = 0.0012

P(no earthquake) = 1 - p(earthquake) = 1 - 0.0012 = 0.9988

X ____ 60,000 ______ - 100

P(X) ___ 0.0012 _____ 0.9988

The expected value of the policy :

E(X) = Σx*p(x)

E(X) = (0.0012 * 60000) + (0.9988 * - 100)

E(X) = 72 - 99.88

E(X) = - 27.88