How much should the store charge for the policy?

Question

A store offers a replacement warranty on an item with a replacement cost of $325 new.

The probability that the item will break during the term of the policy is 17 %

The company needs to make $2 on average per policy.

How much should the store charge for the policy?

Answer 1

Expected Loss = .17 * 325 = 55.25

Desired Profit = 2 = Premium - Expected Loss

2 = Premium - 55.25

57.25 = Premium