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Activity Unit 2.2.2022

The document discusses the concept of expected value in relation to insurance premiums, investments, and gambling. It provides examples involving a roulette game, car insurance pricing, and warranties to illustrate how expected value is calculated and its implications for decision-making. The document includes exercises for calculating probabilities and expected values for different scenarios.

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30 views2 pages

Activity Unit 2.2.2022

The document discusses the concept of expected value in relation to insurance premiums, investments, and gambling. It provides examples involving a roulette game, car insurance pricing, and warranties to illustrate how expected value is calculated and its implications for decision-making. The document includes exercises for calculating probabilities and expected values for different scenarios.

Uploaded by

Camp707
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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MATH 131 – Unit 2 2022

Class Activity 2

Expected value is an important concept to consider when calculating premiums for insurance.
The insurance company will assign probabilities to the possible outcomes for the group based
on research data. The company will then use expected value to determine the premium to
charge.
Expected value can also be used to evaluate some investments and warranties when
experience helps assign reasonable probabilities to profits and losses.
Expected value is used by experienced gamblers to decide which games offer them the best
potential outcomes in the long run.

Example 1: Most casinos have a roulette wheel where there are 38 slots – 18 red, 18 black and
2 green. Dianne plays a game where she puts $1 on a single slot (her lucky number 8). If her
number comes up, she wins $35 plus her $1 bet for a total of $36. If her number does not
come up she loses $1 for a value of - $1. After taking a statistics class, Dianne wants to know if
this is the right game for her if she wants to play multiple times.
a) What is the probability Dianne wins any single spin? _____________________

b) What is the probability Dianne loses a single spin? ______________________

c) Complete the table below with the information above.


𝒙𝒙 𝑷𝑷(𝒙𝒙) 𝒙𝒙 ∙ 𝑷𝑷(𝒙𝒙)

d) What is the expected value for playing a single spin? _______________________


e) Explain what this value means (including the sign of the value) for Dianne.

f) If Dianne decides to stay and play 100 times (and spends$100), what is the expected value
for her?

Example 2: Dan is pricing car insurance from a new company that only pays out at 3 levels:
total, major accident and fender bender. His car is valued at $30,000. After reviewing his
application, his insurance company assigned him to a group with the probabilities listed below.
These values are used to figure the value the company must charge to cover their payouts. If
the company charges a $250 service fee, what will be his annual premium?
𝒙𝒙, 𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑 𝑷𝑷(𝒙𝒙) 𝒙𝒙 ∙ 𝑷𝑷(𝒙𝒙)
30,000 total 0.010

15,000 major 0.020

2,000 fender bender 0.090

0 no accident x

a) Find the value for x in the P(x) column. __________________________

b) Find the expected value of the company payout using 𝜇𝜇 = ∑(𝑥𝑥 ∙ 𝑃𝑃(𝑥𝑥)).

c) To figure Dan’s premium the insurance company uses his expected value amount and adds
a service fee of $250. Find the value. ___________________________________________

d) Does this value seem reasonable for a New Jersey driver?

Example 3: Appliance companies encourage sales by offering warranties on their products so


that customers know they have faith in the product. For a particular TV the manufacturer
offers an extended warranty with cost of $75. The warranty states that the manufacturer will
replace the TV if it fails during the warranty period. The cost of the TV is $888. The company
estimates the probability of failure during the warranty period is 7%. Find the expected value
of the warranty.

Complete the table below with the information above to solve the problem.
𝒙𝒙 𝑷𝑷(𝒙𝒙) 𝒙𝒙 ∙ 𝑷𝑷(𝒙𝒙)

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