Exam C Sample #70

I'm really confused with the conditioning that must be going on in this question. Is this the way to set this question up in the beginning? I follow the rest of the model solution if all of this is true, but I sense this is wrong, please tell me where it is wrong:

First, we need to get the conditional probabilities of rural|group and urban|group for each of the two groups.

Business
E[Business)=1.8=E[Business|Rural]P(Rural|Business)+E[Business|Urban]P(Urban|Business)

Since given business, your either Rural or Urban, that means
1=P(Rural|Business)+P(Urban|Business)

E[Business)=1.8=1.0*P(Rural|Business)+2.0*(1-P(Rural|Business))

P(Rural|Business)=-(1.8-2)=0.2, which implies P(Urban|Business)=0.8

Pleasure
E[Pleasure]=2.3=E[Pleasure|Rural]P(Rural|Pleasure)+E[Pleasure|Urban]P(Urban|Pleasure)

Since given pleasure, your either Rural or Urban, that means
1=P(Rural|Pleasure)+P(Urban|Pleasure)

E[Pleasure)=2.3=1.5*P(Rural|Pleasure)+2.5*(1-P(Rural|Pleasure))

P(Rural|Pleasure)=-(2.3-2.5)=0.2, which implies P(Urban|Pleasure)=0.8

Then, we need to get the joint distribution probabilities from the conditional probabilities we attained above.

Business
0.2=P(Rural|Business)=P(Rural intersect Business)/P(Business)

Since there are equal number of business and pleasure, P(Business)=0.5

P(Rural intersect Business)=0.2*0.5=0.1

0.8=P(Urban|Business)=P(Urban intersect Business)/P(Business)

P(Urban intersect Business)=0.8*0.5=0.4
Pleasure
0.2=P(Rural|Pleasure)=P(Rural intersect Pleasure)/P(Pleasure)

Since there are equal number of business and pleasure, P(Pleasure)=0.5

P(Rural intersect Pleasure)=0.2*0.5=0.1

0.8=P(Urban|Pleasure)=P(Urban intersect Pleasure)/P(Pleasure)

P(Urban intersect Pleasure)=0.8*0.5=0.4

Now, u=E(claims|joint selection)

u=E[Business|Rural]*P(Rural intersect Business)+E[Business|Urban]*P(Business intersect Urban]+E[Pleasure|Rural]*P(Rural intersect Pleasure)+E[Pleasure|Urban]*P(Pleasure intersect Urban]=1.0*0.1+2.0*0.4+1.5*0.1+2.5*0.4=2.05


Exam C Sample #70