Expected Value

[KysoG]

An insurance company estimates the probability of an earthquake in the next year to be 0.0014. They estimate the average damage done by an earthquake to be $60,000. The company offers earthquake insurance for $120 per year, and when damage occurs, the company pays the full price to the customer. Suppose you are working for the company and want to plan for their future finances.

(a) What is the expected value of the insurance company’s payout to a customer in a year?

(b) What is the expected value of the insurance company’s profit from each customer in a year?

 

[Steven G]

What have you tried? Where are you stuck? To receive help we need to know where you need help.

 

[HallsofIvy]

For a single incident like this, "expected value" is the actual "value" of the incident times the probability of the incident.