Health insurance coverage
Could someone check this very complicated problem?
I believe I have the correct answer for part a, the graph is omitted, part c the Variance and Standard Deviation seem a little high, and finally I'm not sure at all on part d, because the expected value would go to infinity. I especially need help with part d. Thanks!
Let X be the total medical expenses (in 1000's of dollars) incurred by a particular individual during a given year. Although X is a discrete random variable, suppose its distribution is quite well approximated by a continuous distribution with pdf .
a) What is the value of k?
= This integral must equal 1 so k=12/5.
b) Graph the pdf of X.
c) What are the expected value and standard deviation of total medical expenses?
E(X)= Let then and . We now have
d) This individual is covered by an insurance plan that entails a $500 deductible provision (so the first $500 worth of expenses are paid by the individual). Then the plan will pay 80% of any additional expenses exceeding $500, and the maximum payment by the individual (including the deductible amount) is $2500. Let Y denote the amount of this individual's medical expenses paid by the insurance company. What is the expected value of Y?
[Hint: First figure out what value of X corresponds to the maximum out-of-pocket expense of $2500. Then write an expression for Y as a function of X (which involves several different pieces) and calculate the expected value of this function.]
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