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An automobile insurance company divides customers into three risk categories: Good (G), Medium (M), and Poor (P). Assume the following distribution of customers: 70% are Good risks, 20% are Medium risks, and 10% are Poor risks. Assume that the probabilities of a customer filing an accident claim (C) in the course of a year are: 0.5% for Good, 1% for Medium, and 2.5% for Poor. A customer is chosen at random.
a) What is the probability that the customer is a good risk and has filed a claim?b) What is the probability that the customer has filed a claim?c) Given that the customer has filed a claim, what is the probability that the customer is a good risk?

Sagot :

Answer:

a) 0.035 = 3.5% probability that a customer is a good risk and has filed a claim.

b) 0.0395 = 3.95% probability that the customer has filed a claim.

c) 0.8861 = 88.61% probability that the customer is a good risk

Step-by-step explanation:

Conditional Probability

We use the conditional probability formula to solve this question. It is

[tex]P(B|A) = \frac{P(A \cap B)}{P(A)}[/tex]

In which

P(B|A) is the probability of event B happening, given that A happened.

[tex]P(A \cap B)[/tex] is the probability of both A and B happening.

P(A) is the probability of A happening.

a) What is the probability that the customer is a good risk and has filed a claim?

70% are good risks.

Of those, 0.5% file a claim. So

[tex]0.7*0.05 = 0.035[/tex]

0.035 = 3.5% probability that a customer is a good risk and has filed a claim.

b) What is the probability that the customer has filed a claim?

0.5% of 70%(good risks)

1% of 20%(medium risks)

2.5% of 10%(poor risks). So

[tex]0.05*0.7 + 0.01*0.2 + 0.025*0.1 = 0.0395[/tex]

0.0395 = 3.95% probability that the customer has filed a claim.

c) Given that the customer has filed a claim, what is the probability that the customer is a good risk?

0.0395 = 3.95% probability that the customer has filed a claim means that [tex]P(A) = 0.0395[/tex]

0.035 = 3.5% probability that a customer is a good risk and has filed a claim means that [tex]P(A \cap B) = 0.035[/tex]

Thus

[tex]P(B|A) = \frac{P(A \cap B)}{P(A)} = \frac{0.035}{0.0395} = 0.8861[/tex]

0.8861 = 88.61% probability that the customer is a good risk

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