An insurance company estimates the probability of an earthquake

| August 31, 2017

Question
Probability: Expected Value
Show your work and explain your reasoning using complete English sentences.
You need to put the title above on your paper and put your name on the top right of your page if you do not do the work on this sheet.

Directions:


1. An insurance company estimates the probability of an earthquake in the next year to be
0.0013. The average damage done by an earthquake it estimates to be $60,000. If the
company offers earthquake insurance for $100, what is the insurance companies’ expected
value of the policy?
(10 points)

2. In a gambling game a person is paid $9 if they draw a Jack or a Queen and $18 if they draw a
King or an Ace from an ordinary deck of 52 playing cards. If they draw any other card, they
lose. How much should they pay to play if the game is to be fair (i.e. expected value is zero)?
(10 points)

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