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From the perspective of the 30 year old male, what is the expected value of the amount...

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surfer3 | Valedictorian

Posted May 25, 2012 at 3:03 AM via web

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From the perspective of the 30 year old male, what is the expected value of the amount that is received from the insurance company in the following case:

There is a .9986 probability that a randomly selected 30 year old male lives through the year. A life insurance company charges $161 for insuring that the male will live through the year. If the male does not survive the year the policy pays out $100,000.

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justaguide | College Teacher | (Level 2) Distinguished Educator

Posted May 25, 2012 at 3:44 AM (Answer #1)

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There is a 0.9986 probability that a randomly selected 30 year old male lives through the year. The policy pays $100000 and the premium charged is $161.

The amount that the person recieves if he dies is $100000 but the probability of this happening is 0.0014. The probability that he does not receive anything is 0.9986. A payment of $161 has to be made in both the cases.

The net expected value of the amount received from the insurance company is 0.0014*100000 - 161 = -$21

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