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Unformatted text preview: HOMEWORK 3 (1) Define the following terms: (a) Stochastic process (b) Markov property (c) Stationarity condition (2) Modeling with Markov Chains Payoff Insurance Company charges a customer accord ing to his or her accident history. A customer who has had no accident during the last two years is charged a $100 annual premium. A customer who has had an accident during each of the last two years is charged a $400 annual premium. A customer who has had an accident during only one of the last two years is charged an annual premium of $300. A customer who has had an accident during the last year has a 10% chance of having an accident during the current year. If a customer has not had an accident during the last year, there is only a 3% chance that he or she will have an accident during the current year. The main question we would like to answer is the following: during a given year, what is the average premium paid by a Payoff customer? The following parts walk you through the problem one step at a time....
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 Summer '10
 Aravkin,AleksandrY
 Math, Markov Chains, Probability theory, Markov chain, Andrey Markov, Markov Chains Payoﬀ Insurance Company, Payoﬀ Insurance Company

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