Scenario: Health Costs Alan is hoping for a healthy year, meaning that he would have zero health costs.Given his habits, there is a 40% chance that Alan will develop a health issue that will result in $50,000 in
Health costs.Assume these are the only two conditions that could exist for Alan in the coming year.
(Scenario: Health Costs) Look at the scenario Health Costs.Suppose that Alan decides to change his habits dramatically and as a result decreases the probability of his developing a health problem such that he now has a 20% chance of becoming ill.What is the expected value of Alan's health costs now?
A)$0
B)$10,000
C)$20,000
D)$2,000

Question

Quizplus · Accepted Answer

The expected value is calculated by multiplying the probability of each outcome by the cost associated with that outcome and then summing the products. Previously, the expected value was (0.6 x 0) + (0.4 x $50,000) = $20,000. With the new probability of 0.2, the expected value becomes (0.8 x 0) + (0.2 x $50,000) = $10,000. So, the best choice is B, as the expected value has decreased by half with the decrease in the probability of illness.

Scenario: Health Costs Alan Is Hoping for a Healthy Year