Question

You work for a small insurance company. Your company is currently insuring 900 different cars for $10,000. If a car you are insuring gets in a crash you have to pay $10,000. Each car you insure has a 5% chance of crashing each year. If 50 cars you insure crash in a given year, you have to pay 50×$10, 000 = $500, 000 in insurance payouts that year.

What is the expected value of the amount your company would pay out?

Answer 1

$25,000.

Step-by-step explanation:

Expected value = Amount the company would pay × Probability of cars crashing each year = $500,000 × 5% = $25,000.

Therefore, the expected value of the amount the company would pay out is $25,000.