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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) Look at the scenario Health Costs. Given the fact that Alan has a 40% chance of developing a health problem, what is the expected value of Alan's health care costs for the coming year?
A) $0
B) $50,000
C) $20,000
D) $16,000

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Quizplus · Accepted Answer

Expected value = (probability of event) * (value if event occurs)Expected value = (0.4) * ($50,000) + (0.6) * ($0) = $20,000

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