2010_EC507_HW2 - EC 507Statistics for Economists Spring...

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EC 507—Statistics for Economists Spring 2010 Problem Set 2 1. Acme Insurance Co. is considering entering the market for freak accident insurance. The CEO of Acme wants you to head the new group to develop products to insure individuals against severely biting their tongue or lip. a. Before structuring and selling the policy, you have to determine just how many claims you may come across in a given day. Assuming ACME will sell 100 LIPTUNG PRO TM policies, and the probability that any covered person will bite their tongue or lip during the day is 1/36, what probability will 0, 1, 2,. . ., or 10 claims be filed in a single day? Model the tongue and tongue/lip biting process as binomial (where the chewing behavior of each policy-holder is independent). b. Graph the binomial probabilities for 0, 1, 2,. . ., 10, . . .claims. This is the probability density for a Binomial(100, 1/36) distribution.
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c. What would the relative frequencies for the number of daily claims be if the process of tongue/lip biting followed a Poisson process? Recall that the Poisson parameter λ can be interpreted as np = , where n and p are the parameters of the binomial process described above. d. Under your direction, ACME sells the product as a trial to 100 clients for two years. Over this time, the actual number of claims within a day occurred with the following frequencies:
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This note was uploaded on 11/09/2010 for the course CAS ec399 taught by Professor Tack during the Spring '10 term at BCUC.

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2010_EC507_HW2 - EC 507Statistics for Economists Spring...

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