posted by Stuart .
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:
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
As I understand it, the four possibilities flood/no-flood combined with buy/not-buy
That said, I am at a loss trying to understand profit outcomes.
However, just compare the expected values of profits under two scenario: 1) she buys, and 2) she doesnt buy.
Under 1) she buys, her expected value is .01*(profit with flood - premium) + .99*(profit no flood - premium)
take it from here.
An investment counselor would like to meet with 12 of his clients on Monday, but he has time for only 8 appointments. How many different combinations of the clients could be considered for inclusion into his limited schedule for that day?