A company buys a policy to insure its revenue in the event of major snowstorms that shut down business. The policy pays nothing for the first such snowstorm of the year and $10,000 for each one thereafter, until the end of the year. The number of major snowstorms per year that shut down business is assumed to have a Poisson distribution with mean 1.5. What is the expected amount paid to the company under this policy during a one-year period?
I know how to calculate the expectation and what the series is. I'm having problems with the summations. I know it should involve:
+∞∑k=2(1.5)kk!
Answer
Let X be the number of snowstorms occurring in the given year and let Y be the amount paid to the company. Call one unit of money $10,000.
Then Y takes the value 0 when X=0 or X=1, the value 1 when X=2, the value 2 when X=3, etc..
The expected payment is
E(Y)=∞∑k=2(k−1)P[X=k]=∞∑k=2(k−1)e−1.5(1.5)kk!=∞∑k=1(k−1)e−1.5(1.5)kk!=∞∑k=1ke−1.5(1.5)kk!−∞∑k=1e−1.5(1.5)kk!=∞∑k=0ke−1.5(1.5)kk!⏟mean of X−(−e−1.5+∞∑k=0e−1.5(1.5)kk!⏟=1)=1.5+e−1.5−1=0.5+e−1.5≈.7231units.
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