My Math Forum Insurance Policy Problem

 December 31st, 2013, 07:18 AM #1 Newbie   Joined: Dec 2013 Posts: 1 Thanks: 0 Insurance Policy Problem Hi, I just encountered this question today and I cannot solve it. The question is: Suppose the premium of a home insurance policy is $200 and in case of a fire the insurance company will pay out$200,000. Let X denotes the profit(or loss) of such a policy. X is a random variable. The expected value of X depends on a probability of a fire, p=0.0002. If an insurance agent wants to sell such policy to you, will you buy the policy? why? I really do not know how to proceed this question. This is the last part of the question and i already solved the previous parts. Thank you very much
 December 31st, 2013, 09:34 AM #2 Senior Member   Joined: Oct 2013 From: New York, USA Posts: 661 Thanks: 87 Re: Insurance Policy Problem Converting it to fraction, the probability of a fire = 1/5000. Therefore if 5,000 policies are sold, the insurance company will collect $1,000,000 (1 million) and pay out$200,000 for an insurance company profit of $800,000, which is$160 per policy. Based on the probability of a fire, a policy should cost $40 and you should not buy the policy in question. December 31st, 2013, 10:10 AM #3 Math Team Joined: Oct 2011 From: Ottawa Ontario, Canada Posts: 14,597 Thanks: 1038 Re: Insurance Policy Problem Quote:  Originally Posted by EvanJ ....a policy should cost$40 and you should not buy the policy in question.

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