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Unformatted text preview: work and steady research, you have discovered that the CDF of medical risk of those you insure is always characterized by an exponential distribution. That is, the probability that someones annual medical expenditures are less than $ T is: Pr ( e t < T ) = 1eT , where is that persons risk parameter. What is the pdf of the risk faced by the person in question? Would you expect a young person to have a larger than an old person? (Hint: the expectation of an exponential random variable is 1 .) A colleague of yours claims that medical risks can always be described by the normal distribution. Why might your colleague be wrong? 1...
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 Fall '10
 KOCH
 Economics, Utility

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