An insurance policy costs $100 and will pay policyholders $10,000 if they suffer a major injury (resulting in hospitalization) or $3000 if they suffer a minor injury (resulting in lost time from work). The company estimates that each year 1 in every 2000 policyholders may have a major injury, and 1 in 500 a minor injury only.
a) Create a probability model for the profit on a policy.
b) What’s the company’s expected profit on this policy?
c) What’s the standard deviation?