Correct Response: B. Since the probability that the company will pay a claim is 1 in 600, the company can expect to pay (1/600)(1,200,000) = 2,000 claims per year. The total earned from selling policies in a year is (1,200,000 policies)($300/policy) = $360,000,000. If 2,000 claims are paid, then 2,000 x $1,200,000 = $240,000,000 is paid per year. The difference is $360,000,000 - $240,000,000 = $120,000,000, which is the total profit. To find the profit per policy, divide this by the number of policies or $120,000,000/1,200,000 policies = $100 per policy. Response A is 50% of $100, response C is twice $100, and response D is (2.5)($100).
