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July 28, 2015

Homework Help: Statistics

Posted by Stuart on Monday, February 16, 2009 at 3:57pm.

1) Laura McCarthy, the owner of Riverside Bakery, has been approached by insurance underwriters trying to convince her to purchase flood insurance. According to local meterologist, there is a 0.01 probability that the river will flood next year. Riverside's profits for the coming year depend on whether Laura buys the flood insurance and whether the river floods. The profits (which take into consideration the $10,000 premium for the flood insurance) for the four possible combinations of Laura's choice and river conditions are:


The River

Does not flood Floods
Insurance No flood
Decision Insurance $200,000 -$1,000,000
Get flood Insurance $190,000 $200,000

a) If Laura decides not to purchase flood insurance, use the approach discrete probability
distribution to determine Riverside's expected profit next year.
b) If Laura purchases the flood insurance, what will be Riverside's expected profit next year?
c) Given the results in parts (a) and (b), provide Laura with a recommendation

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