could u plz answer all the qustions 2 Suppose that the mean

2) Suppose that the mean loss from a fire in a year is $250 a year. (Most of us have no loss, but a few lose their homes. The $250 is the average loss.) An insurance company plans to sell fire insurance for $250 plus enough to cover costs and profit. Explain clearly why it would be unwise to sell only 12 policies. Then explain why selling thousands of such policies is safe business.

Solution

(2)

Since insurance company sells insurance for $250 so for 12 policies company got 12*$250=$3000 only. Even though fire is a rare event, but if one house will get fire and supoose have loss $3000 or more, than company will not able to pay the loss.

On the other hand, if company sells thousnads of policies say 1000, then company gets $250,000. In that case company face the real risk. And now suppose 20 houses get fire with a average loss of $500 then company have to pay $500*20=$1000. That is company is easily able to pay. Even though if loss is high company can pay easily. And if we take average loss given in the question , then company will able to pay more easily. So selling thousand of policies is safer.