Answered

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If the executives at Avicenna know that they will sell many of these policies, should they expect to make or lose money from offering them? How much?

If The Executives At Avicenna Know That They Will Sell Many Of These Policies Should They Expect To Make Or Lose Money From Offering Them How Much class=

Sagot :

In order to calculate the expected value of one policy, we can use the formula below:

[tex]E(x)=\sum x\cdot p(x)[/tex]

When the holder of the policy dies before 70 years old (probability of 3%), the company will earn $765 but will lose $27400. If the holder dies after 70 years old, the company will earn $765.

So the expected value is:

[tex]\begin{gathered} E(x)=0.03\cdot(765-27400)+0.97\cdot765\\ \\ E(x)=0.03\cdot(-26635)+742.05\\ \\ E(x)=-799.05+742.05\\ \\ E(x)=-57 \end{gathered}[/tex]

Since the expected value is negative, that means the company should expect to have a loss of $57 for each insurance policy sold.

Therefore the correct option is the second one, and the expected loss is $57 per policy.

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