Suppose a person is looking for a one-year life insurance policy. They decide on a $232994 policy. This policy costs $291 per year. Suppose the probability the person dies in the year is 0.0006. Find the expected value of the policy for the insurance company. Give your answer as a decimal to at least two decimal places.

Question
Asked Sep 27, 2019
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Suppose a person is looking for a one-year life insurance policy. They decide on a $232994 policy. This policy costs $291 per year. Suppose the probability the person dies in the year is 0.0006. Find the expected value of the policy for the insurance company. Give your answer as a decimal to at least two decimal places.

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Expert Answer

Step 1

Probability of dying =0.0006

Probability of not dying = 1-0.0006 =0.9994

Net profit to company if person dies = -$232994 +$291

Net profit to company if person does not die = $291

Possible outcomes
Probability of
Net value to company
х.Р(х)
outcome P
X
-$232994 $291
+$291
-$139.6218
$290.8254
$151.2036
Person dies
0.0006
Person does not die
0.9994
Total
help_outline

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Possible outcomes Probability of Net value to company х.Р(х) outcome P X -$232994 $291 +$291 -$139.6218 $290.8254 $151.2036 Person dies 0.0006 Person does not die 0.9994 Total

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Step 2

Expected value can be calcul...

Σx. Ρ(3)
= ( - $232994 + $291)*0.0006 + $291 *0.9994
Expected value };
X. P(x)
=-$139.6218+ $290.8254
=$151.2036
help_outline

Image Transcriptionclose

Σx. Ρ(3) = ( - $232994 + $291)*0.0006 + $291 *0.9994 Expected value }; X. P(x) =-$139.6218+ $290.8254 =$151.2036

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