Question

You insurance policy on your car costs $600 a year. If you total your vehicle, you insurance company will pay $25,000 towards a new vehicle.The probability that you will total your car is .002. What is your annual expected value?

Answer 1

Your annual expected value is -$550.

Explanation:

0.002 probability that you will total your car.

If you total your car, you pay the insurance of $600, but you get the $25,000 insurance. So in total, the net value will be $24,400.

1-0.002 = 0.998 probability that you will not total your car.

In this case, you lose $600.

What is your annual expected value?

Multiply each net value by it's probability.

E = 0.002*24400 - 0.998*600 = -550

Your annual expected value is -$550.