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first and foremost, I want to state that this is a homework question and I'm not sure if its against the rules, but I'm not looking for the answer, I'm just looking for the methodology to solve it as I can't find it anywhere else.

There was a post similar to this previously, but I had a hard time understanding it.

how do i calculate the threshold value of the following problem?

Is there anyone that can guide me through this question?

Jeugasce
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  • Could you point out which part you have difficulty understanding? – Jay Zha May 24 '17 at 17:29
  • using the formula given in the comment, I got 2000-((2000-100)x0.05)-(2000x0.01) = 1885. However, both answers given by the one asking the question and the person answering it did not match – Jeugasce May 24 '17 at 17:31
  • Why do you have (2000-100)x0.05? The answer is not laying out that way though – Jay Zha May 24 '17 at 17:35
  • The first occurs with probability 0.05 and would reduce the value of the asset to $100. Doesn't it mean that the expected loss would be 1900x0.05? Since the value dropped from 2000 to 100 – Jeugasce May 24 '17 at 17:38
  • So the question says the value is reduced to $100$, not reduce $100$ – Jay Zha May 24 '17 at 17:44

1 Answers1

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Expected value from the asset Ev=$2000-1900\cdot 1({\text{event 1 occurs but 2 does not}})-2000\cdot 1(\text{event 2 occurs}) $

The point is if the asset (suppose a car) is totally destroyed, a reduction in value of the asset is irrelevant, I would not be able to sell the car and get anything out of it in any case.

I should be ready to pay $2000$-Ev

Juanito
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  • The loss in the first case is 1900. Quote:$\texttt{"...and would reduce the value of the asset} \ \color{red}{to} \ $100$" – callculus42 May 24 '17 at 18:10
  • Hi, thank you for the confirmation, however, the question that im faced with asked for the perspective of each party involved. How do I answer that? – Jeugasce May 24 '17 at 18:22
  • I did not get that part, who are the parties involved? You and the insurance company? – Juanito May 24 '17 at 18:26
  • Yes, just me and the insurance company – Jeugasce May 24 '17 at 18:45
  • It should be the same number, as, the value of insurance is exactly what the insurance company are expected to pay on average. – Juanito May 24 '17 at 18:58
  • If there is a chance of the value of the item increasing, will it affect the value of insurance at all? – Jeugasce May 25 '17 at 05:41
  • If you want to insure for the extra returns (increased value) additionally, only then would it change things. – Juanito May 25 '17 at 07:33