Claim amounts for wind damage to insured homes are independent random variables with common density function f(x) = 3x −4 for x > 1, and f(x) = 0 otherwise, where x is the amount of a claim in thousands. Suppose 3 such claims are made. What is the expected value of the largest of the three claims?

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Answer:

2025

Step-by-step explanation:

Let X1, X2, X3 mean the three cases, and Y = max(X1, X2, X3)

F(y)=P(max(X1,X2,X3)≤y)=P(X1 ≤y) P(X2 ≤y) P(X3 ≤y) =(Z y

1 3x^-4dx)^3= (1-1/y^3)^3

=9(1/2-2/5+1/8)

=81/40

=2.025

Since the units are a huge number of dollars, the appropriate response is 2025 .

Answer:

The expected value of the largest of the three claims is $ 2025.00

Step-by-step explanation:

To solve the question, if we have the three claims given by

C₁, C₂, C₃ and the let the maximum claim be denoted by M = max(C₁, C₂, C₃)

If the expected value of M is expressed as E(M) and the common density function is F(m)  with p,d,f f(m) = F'(m) of M

Therefore, F(m) = P (max C₁, C₂, C₃) ≤ M) = P (C₁ ≤m) ×  P (C₂ ≤m) × P (C₃ ≤m)

[tex](\int\limits^y_1 {3x^{-4}} \, dx )^3[/tex]= [tex](1-\frac{1}{m^3} )^{3[/tex]  

From which

F'(m) = [tex]\frac{3}{m^4}\times 3\times (1-\frac{1}{m^3} )^{2[/tex] = [tex]\frac{9}{m^4} (1-\frac{1}{m^3} )^{2[/tex]

E(M) = [tex]\int\limits^\infty_1 {m f(m)} \, dm = \int\limits^\infty_1 {\frac{9}{m^3} (1-\frac{1}{m^3} )^{2\, dm[/tex]

Which gives [tex]9\times \int\limits^\infty_1 {\frac{1}{m^3} (1-\frac{1}{m^3} )^{2\, dm[/tex]

= [tex]9\times \int\limits^\infty_1 { (\frac{1}{m^3} -\frac{2}{m^6} + \frac{1}{m^9} )\, dm[/tex]

= 9×[tex](\frac{1}{2}-\frac{2}{5}+\frac{1}{8})[/tex] = $ 2.025 × 10³

=$ 2025.00

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