Maritime Insurance Company offers insurance policies for recreational boats. A t

Question

Maritime Insurance Company offers insurance policies for recreational boats. A typical policy will pay the replacement cost of $25,000 if the boat is a total loss.If the boat is not a total loss but the damage is more than $10,000 the policy pays $5,000. For damage under $10,000, no coverage is offered. The company estimates the probability of no damage to be .60, the probability of damage between $0 and $10,000 to be .25, and the probability of damage between $10,000 and $25,000 to be.12 If the company wants to make a profit of $200 above the expected cots, what should be the price of the policy?

Explanation / Answer

let its PRICE P

then ,

P - 0.6 x 0 + 0.25 x 0 + 0.12 x 5000 + (1 - 0.6 - 0.25 - 0.12) x 25000 = 200

so, P = $1550

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