Question

An insurance company sells a homeowner insurance policy that is $600 per year policy the insurance company predicts that the probability of having a home being damaged in the area. It sells this policy is about 1. over 1000 if the house is damaged the insurance company expects to pay $400,000 to the homeowners. If the company were to sell 250 policies how much money can it expect to gain or lose?

Answer 1

Answer:

$50,000

Explanation:

Expected value = $E_{1}$ x $P_{1}$ + $E_{2}$ x $P_{2}$

= $600 x $\frac{900}{1,000}$ + (-$399,400) x $\frac{1}{1,000}$

= $599.40 - $399.40

= $200

$200 x 250 = $50,000

The insurance company can expect to make $50,000 from selling 250 policies.