There is a 1 percent chance that you will have healthcare bi

There is a 1 percent chance that you will have healthcare bills of $100,000, a 19 percent chance that you will have healthcare bills of $10,000, a 60 percent chance that you will have healthcare bills of $500, and a 20 percent chance that you will have healthcare bills of $0. What will your expected insurance benefits be? Would you be willing to buy complete insurance coverage if it cost $3,712? Explain.

Solution

The required table is as below:

Healthcare bill X

Chance P

Expectation X × P

$100,000

0.01

$1,000

$10,000

0.19

$1,900

$500

0.60

$300

$0

0.20

$0

$3,200

Expected insurance benefit is $3,200.

The insurance package of $3,712 should not be bought, since it is exceeding the expected insurance benefit.