Question

Expected Value Problems Lesson 4 . When all factors are taken into account, an insurance company estimates that the probability nto account, an insurance company estimates that the probability of my father making a damages to his pontoon boat for $5000 is 0.1. and that the probability of the pontoon boat being totally destroyed is .005. Should that tragedy happen, the company will have to pay $15,000. The company $1000 for the insurance policy. What is the expected value of this policy to my father will have to pay $15,000. The company charges my father Step 1: Build the probability model that describes this situation: Amount Probability Probability T Product Step 2: Find the Expected Value to my father Step 3: Find the Expected Value to the Insurance Company Step 4: Interpret the Expected Values

Answer 1

Amount	Probability	Product
- $1000	1	Installment
$5000	0.1	Damages
$15000	0.005	Destroyed

Expected value to father = -1000*1 + 5000*0.1 + 15000*0.005

Expected value to father = -1000 + 500 + 75

Expected value to father = - $425

Expected value to company = -( Expected value to father )

.Expected value to company = -(-425)

Expected value to company = $425

Overall the company will gain $425 and the father will lose $425.