Interest/Expected value

Question

Assume 5 out of every 3000 students at a local community college have to quit due to health issues. AN insurance company offers them a $9,000 policy for $50 a year. What is the amount the insurance company should expect to make on average for every student that pays?

Answer 1

The probability that a student would quite is 5/3000 = 1/600.

 

So the expected pay-out on a $9000 policy is 9000 * 1/600 = $15.

 

Since they charge $50 for the policy, their expected profit is $50 - $15 = $35 per policy.