Thursday, 26 November 2015

Expectation Poisson Distribution



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(k1)P[X=k]=k=2(k1)e1.5(1.5)kk!=k=1(k1)e1.5(1.5)kk!=k=1ke1.5(1.5)kk!k=1e1.5(1.5)kk!=k=0ke1.5(1.5)kk!mean of X(e1.5+k=0e1.5(1.5)kk!=1)=1.5+e1.51=0.5+e1.5.7231units.


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