A recent study indicates that the annual cost of maintaining and repairing a car in a town in Ontario averages 200 with a variance of 260. A tax of 20% is introduced on all items associated with the maintenance and repair of cars (i.e., everything is made 20% more expensive). Calculate the variance of the annual cost of maintaining and repairing a car after the tax is introduced.
Copyright 2023. The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.
Solution: E
Let X and Y denote the annual cost of maintaining and repairing a car before and after the 20% tax, respectively. Then Y = 1.2X and Var[Y] = Var[1.2X] = (1.2)2 Var[X] = (1.2)2(260) = 374.4.
Copyright 2023. The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.