5. Assume Angelina paid $3,000 for her laptop computer. The probability of the c

Question

5. Assume Angelina paid $3,000 for her laptop computer. The probability of the computer being stolen is 0.02 if she exercises care and 0.05 if she is not. Exercising care may include using a lock, not leaving the laptop unsecured in a public area, etc. a. Calculate her expected loss if she exercises care. b. Calculate her expected loss if she does not exercise care. c. How much (in dollar terms) should she be willing to spend in exercising care about the computer? d. If she had purchased insurance that replaced the computer if it were stolen, how much would she be willing to spend in exercising care about (ignore the costs of lost data and time in getting a replacement)? e. If you were the insurance company providing theft coverage to Angelina, what is the minimum amount of premium you would charge her just to cover your costs?

Explanation / Answer

a. Expected loss = (0.02 * 3000) + (0.98 *0) = $60

b. Expected loss = (0.05 * 3000) + (0.95 *0) = $150  

c. The maximum she would be willing to pay is 150-60 = $90

d. In this case Expected loss with no care = $0 and Expected loss with care = 0 because if the insurance is taken she would lose nothing even if she lost the laptop because that would be replaced by the insurance company. So she would not spend any extra amount in taking care.

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