What is the expected amount of reimbursement

Reference no: EM131001302

You are the manufacturer of a product that gives guarantees against failure. Each month there is a 50% chance that there will be exactly one failure, a 30% chance that there will be exactly two failures, and a 20% chance that there will be exactly three failures. Moreover, 20% of failures will be complete, requiring a full reimbursement of 800, while 80% will require only partial reimbursement of 400. Each month you purchase insurance that will provide all reimbursements for that period above a total of 1000. (So, for example, if there were three complete failures, the insurer would pay 1400.) What is the expected amount of reimbursement that the insurer will pay each month?

Reference no: EM131001302

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