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Rhoda Ronner owns a $500,000 home and has a 1% chance of experiencing a loss that destroys her home in any given year. Now suppose
Rhoda Ronner owns a $500,000 home and has a 1% chance of experiencing a loss that destroys her home in any given year.
Now suppose Wile E. has a 3% chance of experiencing a total loss in any given year. Rhoda's probability of a total loss in any given year has not changed. Suppose Freedom Insurance Company still offers Wile E. and Rhoda the same insurance contract and charges them the same premium; in other words, Freedom Insurance Company put Rhoda and Wile E. into the same risk pool. Show calculations; display four decimal places.
- Create a probability distribution table of possible outcomes for Freedom Insurance Company if Freedom sells insurance to both Rhoda and Wile E. Show calculations; display four decimal places.
- What premium amount must Wile E. and Rhoda each individually pay if Freedom Insurance Company wants to "break even"? Show calculations.
- Will Wile E. purchase this contract if he is charged the "break-even" premium? Will Rhoda purchase this contract if she is charged the "break-even" premium? Briefly explain your reason. Show calculations.
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