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Marciel is considering buying a flood insurance policy for the upcoming year that costs 600 dollars and is worth 50,000 dollars if her home floods. Based on previous years, she estimates that there is a 2% chance of her home flooding this year. Is the "Expected Value" $800.00?

Answer :

Solution:

The probability given is

[tex]\begin{gathered} 50000-600=49400 \\ Pr(x=49,400)=2\%=0.02 \\ Pr(x=-600)=(100-2)\%=98\%=0.98 \end{gathered}[/tex]

Therefore,

The expected value of buying this insurance policy will be given below as

[tex]\begin{gathered} (49400\times0.02)+(-600\times0.98) \\ =988-588 \\ =400 \end{gathered}[/tex]

Hence,

The final answer is

[tex]\Rightarrow\text{ \$}400\text{ }[/tex]

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