{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Tutorial 3 S11

# Tutorial 3 S11 - Tutorial 3 1.Alexander Industries is...

This preview shows pages 1–2. Sign up to view the full content.

Tutorial 3 1. Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis, Missouri. The policy has an annual cost of \$10,000. If Alexander Industries doesn't purchase the insurance and minor fire damage occurs, a cost of \$100,000 is anticipated; the cost if major or total destruction occurs is \$200,000. The costs, including the state-of-nature probabilities, are as follows. Damage Decision Alternative None s 1 Minor s 2 Major s 3 Purchase insurance, d 1 10,000 10,000 10,000 Do not purchase insurance, d 2 0 100,000 200,000 Probabilities 0.96 0.03 0.01 a. Using the expected value approach, what decision do you recommend? b. What lottery would you use to assess utilities? (Note: Because the data are costs, the best payoff is \$0.) c. Assume that you found the following indifference probabilities for the lottery defined in part (b). What decision would you recommend? Cost Indifference Probability 10,000 p = 0.99 100,000 p = 0.60 d. Do you favor using expected value or expected utility for this decision problem?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}