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Leia is considering insuring against theft the new $300 CD-player she just installed in her automobile. Her insurance agent tells her that such an option could be added to her present policy for $30 per year. The agent further states that the probability of theft is 0.2 in a given year. If she takes the insurance, what is her expected return per year

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Parrain

Answer: $30

Explanation:

If the CD-player is stolen, Leia would get a replacement from the insurance so her return for the year would be:

= Amount received from insurance - Amount paid in premiums

= 300- 30

= $270

If the CD player is not stolen, she will pay the premium of $30 so her return for the year would be: -$30

Expected return per year = (Probability of CD stolen * Return if stolen) + ( Probability of CD not being stolen * Return if not stolen)

= (0.2 * 270) + (0.8 * -30)

= $30

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