Question

An individual who has automobile insurance from a certain company is randomly selected. Let Y be the number of moving violations for which the individual was cited during the last 3 years. The pmf of Y is the following.

y 0 1 2 3
p(y) 0.50 0.25 0.20 0.05
A) Compute E(Y).
B) Suppose an individual with Y violations incurs a surcharge of $110Y2. Calculate the expected amount of the surcharg.

Answer 1

A. The E(Y) is 0.80

B. The expected amount of the surcharges is $165

Explanation:

A. In order to calculate the E(Y), we would have to calculate the following formula:

E(Y)=∑yp(y)

E(Y)=(0*0.5)+(1*0.25)+(2*0.20)+(3*0.05)

E(Y)=0+0.25+0.40+0.15

E(Y)=0.80

B. In order to calculate the expected amount of the surcharges we would have to calculate the following formula:

E($110Y∧2)=110E(Y∧2)

=110∑y∧2p(y)

=110((0∧2*0.5)+(1∧2*0.25)+(2∧2*0.20)+(3∧2*0.05))

110(0+0.25+0.80+0.45)

=$165