Probability: Expected Value
Problem 1: An insurance company estimates the probability of an earthquake in the next year to be 0.0013. The average damage did by an earthquake it estimates to be $60,000. If the company offers earthquake insurance for $100, what is the insurance companies' expected value of the policy?
Problem 2: In a gambling game a person is paid $9 if they draw a jack or a Queen and $18 if they draw a King or an Ace from an ordinary deck of 52 playing cards. If they draw any other card, they lose. How much should they pay to play if the game is to be fair (i.e., expected value is zero)?