Question 1
The table shows claims and their probabilities for an insurance company.
Amount of Claim Probability
$0 0.60
$50,000 0.25
$100,000 0.09
$150,000 0.04
$200,000 0.01
$250,000 0.01
(a) Calculate the expected value.
(b) How much should the company charge as an average premium so that it breaks even on its claim costs?
(c) How much should the company charge to make a profit of
per policy?
◦ (a) $32,000 (b) $16,000 (c) 16,090
◦ (a) $32,000 (b) $16,,000 (c) 32,090
◦ (a) $32,000 (b) $32,000 (c) 32,090
◦ (a) $16,000 (b) $32,000 (c) 32,090
Question 2
An architect is considering bidding for the design of a new shopping mall. The cost of drawing plans and submitting a model is $10,000. The probability of being awarded the bid is 0.12, and anticipated profits are $100,000, resulting in a possible gain of this amount minus the $10,000 cost for plans and a model. What is the expected value in this situation?
◦ $12,000
◦ $10,800
◦
$2000◦ $11,000
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