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Scenario: Health Costs
Alan is hoping for a healthy year,meaning that he would have zero health costs.Given his habits,there is a 40% chance that Alan will develop a health issue resulting in $50 000 in health costs.Assume these are the only two conditions that could exist for Alan in the coming year.
-(Scenario: Health Costs)Use Scenario: Health Costs.Suppose that Alan decides to change his habits dramatically and,as a result,decreases the probability of his developing a health problem such that he now has a 20% chance of becoming ill.What is the expected value of Alan's health costs now?
A) $0
B) $10 000
C) $20 000
D) $2 000

Question

Quizplus · Accepted Answer

The expected value of Alan's health costs can be calculated as follows:
Expected value = (probability of no health issue * $0) + (probability of health issue * $50 000)
Before changing his habits: 
Expected value = (0.6 * $0) + (0.4 * $50 000) = $20 000
After changing his habits: 
Expected value = (0.8 * $0) + (0.2 * $50 000) = $10 000
Therefore, the expected value of Alan's health costs now is $10 000.

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