Exam P Practice Problem 87 – Modeling Insurance Payments

Problem 87-A

A business owner is facing a risk whose economic loss is modeled by the random variable $X$. The following is the density function of $X$.

$\displaystyle f(x)=\frac{1}{8} \ (4-x) \ \ \ \ \ \ \ \ 0

The business owner purchases an insurance policy to cover this potential loss. The insurance policy pays the business owner 80% of the amount of each loss.

Given that a loss has occurred, what is the probability that the amount of the insurance payment to the business owner is less than 2?

$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ 0.25$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ 0.36$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ 0.64$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ 0.75$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ 0.86$

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Problem 87-B

An individual purchases an insurance policy to cover a loss $X$ whose density function is:

$\displaystyle f(x)=\frac{1}{1800} \ x \ \ \ \ \ \ \ \ 0

The insurance policy reimburses the policy owner 50% of each loss. Given that a loss has occurred, what is the median amount of the insurance payment made to the policy owner?

$\displaystyle (A) \ \ \ \ \ \ \ \ \ \ \ \ 15.00$

$\displaystyle (B) \ \ \ \ \ \ \ \ \ \ \ \ 18.65$

$\displaystyle (C) \ \ \ \ \ \ \ \ \ \ \ \ 21.21$

$\displaystyle (D) \ \ \ \ \ \ \ \ \ \ \ \ 23.63$

$\displaystyle (E) \ \ \ \ \ \ \ \ \ \ \ \ 42.43$

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$\copyright \ 2014 \ \ \text{ Dan Ma}$