An insurance policy costs $140 per year,and will pay policyholders $15,000 if they suffer a major injury (resulting in hospitalization)or $7000 if they suffer a minor injury (resulting in lost time from work).The company estimates that each year 1 in every 2200 policyholders will have a major injury and 1 in every 400 a minor injury.What is the company's expected profit on this policy?
A)$115.68
B)$99.32
C)$130.68
D)-$24.32
E)-$297.95

Question

Quizplus · Accepted Answer

The expected payout for major injuries is $15,000 * (1/2200) = $6.82, and for minor injuries is $7,000 * (1/400) = $17.50. The total expected payout is $6.82 + $17.50 = $24.32. The expected profit is the policy cost minus the expected payout: $140 - $24.32 = $115.68.

An Insurance Policy Costs $140 Per Year,and Will Pay Policyholders