Homework Clinic
Social Science Clinic => Economics => Topic started by: isam on Nov 23, 2022
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Suppose an insurance company has two types of customers: low-cost customers with an average cost of $3,750 and high-cost customers with an average cost of $9,000. If the insurance company expects to have a 50-50 mix of customers, what is their expected average cost per customer? When the insurance company charges a premium equal to their expected average cost, however, they find that only 30 percent of their customers are low-cost customers. What is the actual average cost per customer?
Please round your final answer to two decimal places.
◦ $6,375.00, $5,325.00
◦ $12,750.00, $5,325.00
◦ $12,750.00, $7,425.00
◦ $6,375.00, $7,425.00
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$6,375.00, $7,425.00
The average cost equals the average cost of low-cost customers times the percentage of low-cost customers plus the average cost of high-cost customers times the percentage of high-cost customers.
Average cost = average cost for low-cost*percentage of low-cost + average cost for high-cost*percentage of high-cost
If the insurance company expects a 50-50 mix of customers:
Expected average cost = 3,750*0.5 + 9,000*0.5 = $6,375.00
If the insurance company charges a premium equal to their expected average cost, however, only 30 percent of their customers are low-cost customers.
Actual average cost = 3,750*0.3 + 9,000*0.7 = $7,425.00