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Mark owns a stamp collection that he is considering getting insured. Over the course of a year it will cost him $500 to keep his collection insured, but if he his collection is damaged they will pay him $1000. If he estimates there’s a 10% chance of his collection being damaged, what is the expected value of buying the insurance policy?: *

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Answer:

EV = -$400

The expected value of buying the insurance policy is -$400

Explanation:

Expected value of buying the insurance policy;

EV = expected benefits - insurance cost

EV = xE - C

chances of collection being damaged x = 10% = 0.1

Insurance cost C = $500

Benefit E = $1000

Substituting the values;

EV = 0.1 × 1000 - 500 = 100 - 500

EV = -$400

The expected value of buying the insurance policy is -$400

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