Answer:
The insurance company can expect to make $900 on the policy
Step-by-step explanation:
The given parameters are;
The amount Ted pays per year for insurance on his home = $1,400
The value of the insurance policy = $5000
The chance that Ted will make a claim on the policy = 10%
The expected value is given as follows
Incidence [tex]{}[/tex] Probability Value v × p
A claim is made [tex]{}[/tex] 0.1 $5,000 - $1,400 = -$3,600 -$360
No claim [tex]{}[/tex] 0.9 [tex]{}[/tex] $1,400 $1260
Expected value is $1,260 - $360 = $900
The value the insurance company can be expected to make on average on the policy is $900
