Chapter 8.1, Problem 8.23E

(a)

To determine

To construct a table that shows the probability distribution of Y .

Explanation of Solution

The profit is the $\$300$ of the home insurance policy which is decreased by $\$200,000$ if the house was destroyed.

  

(b)

To determine

To compute the expected value of Y and explain what this result means for the insurance company.

Answer to Problem 8.23E

  $EV=\$259.46$

Explanation of Solution

The expected value is as:

  $\begin{array}{l}EV=0.0002\times (-\$199700)+0.9998\times \$300\\ =\$259.46\end{array}$

This means that the insurance company will make a profit on average about $\$259.46$ on every insurance policy.