Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN: 9781305627734
Author: Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 15, Problem 20P
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:
- 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?
- d. Do you favor using expected value or expected utility for this decision problem? Why?
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
3. What would be the yearly premium for a
$50,000 insurance policy against accidental
household
flood if the likelihood of an accidental household
flood is estimated to be 0.005 and the
company wishes to have a yearly expected gain of
$2000?
a. $2, 250.
b. $2,550.
c. $2,500.
d. $2,520.
4. A manufacturer of electronic equipment buys
spare parts for replacement and repairs in lots of
one-thousand from the supplier. The
manufacturer uses these spare parts to fix items
under
warrantee. Past historical records show that the
probability of any one spare part being
defective is unlikely and assumed to be one in
one-thousand. In a shipment of one-thousand
spare parts the probability of two defectives is
a. 0.148.
b. 0.184.
c. 0.366.
d. 0.386.
5. What is the probability of getting exactly three
heads in five flips of a balance coin?
a. 5/16
b. 3/16
c. 7/16
d. 9/16
Suppose that a life insurance company insures
900,000
fifty-year-old people in a given year. (Assume a death rate of
8
per 1000 people.) The cost of the premium is
$500
per year, and the death benefit is
$45,000.
What is the expected profit or loss for the insurance company?
1. Jason’s total wealth by 2024, including his house, will be $500,000. There is a 10% chance that a typhoon will occur next year and destroy his house, valued at $200,000. What is Jason’s expected wealth by 2024 if he chooses not to purchase insurance?
2. Tanya is graduating this semester. She has been offered a job paying a salary of $24,000. She has also applied for a job with an annual salary of $32,000. If her probability of being offered a better job is 3/4, what is her expected income next year? What are the variance and standard deviation of her income next year?
Chapter 15 Solutions
Essentials of Business Analytics (MindTap Course List)
Ch. 15 - Prob. 1PCh. 15 - Southland Corporation’s decision to produce a new...Ch. 15 - Amy Lloyd is interested in leasing a new Honda and...Ch. 15 - Investment advisors estimated the stock market...Ch. 15 - Hudson Corporation is considering three options...Ch. 15 - Prob. 6PCh. 15 - Myrtle Air Express decided to offer direct service...Ch. 15 - Video Tech is considering marketing one of two new...Ch. 15 - Seneca Hill Winery recently purchased land for the...Ch. 15 - Hemmingway, Inc. is considering a $5 million...
Ch. 15 - The following profit payoff table was presented in...Ch. 15 - Suppose that you are given a decision situation...Ch. 15 - A firm has three investment alternatives. Payoffs...Ch. 15 - Alexander Industries is considering purchasing an...Ch. 15 - In a certain state lottery, a lottery ticket costs...Ch. 15 - Three decision makers have assessed utilities for...Ch. 15 - In Problem 22, if P(s1) = 0.25, P(s2) = 0.50, and...Ch. 15 - Translate the following monetary payoffs into...Ch. 15 - Consider a decision maker who is comfortable with...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, statistics and related others by exploring similar questions and additional content below.Similar questions
- Assume that the probability of a security breach is 1 percent. The chance of your computer system being damaged during such an attack is 5 percent. If the system is damaged, the average estimated damage will be $ 50 million. What is the expected loss in dollars? In the above question, an insurance agent is willing to insure your facility for an annual fee of $35,000.00. Should the company accept the offer based on the cost benefit analysis?arrow_forwardAvicenna, a major insurance company, offers five-year life insurance policies to 65-year-olds. If the holder of one of these policies dies before the age of 70, the company must pay out $27,400 to the beneficiary of the policy. Executives at Avicenna are considering offering these policies for $765 each. Suppose that for each holder of a policy there is a 3% chance that they will die before the age of 70 and a 97% chance they will live to the age of 70. If the executives at Avicenna know that they will sell many of these policies, should they expect to make or lose money from offering them? How much? To answer, take into account the price of the policy and the expected value of the amount paid out to the beneficiary. Avicenna can expect to make money from offering these policies. In the long run, they should expect to make dollars on each policy sold. O Avicenna can expect to lose money from offering these policies. In the long run, they should expect to lose dollars on each policy…arrow_forwardAvicenna, a major insurance company, offers five-year life insurance policies to 65-year-olds. If the holder of one of these policies dies before the age of 70, the company must pay out $23,600 to the beneficiary of the policy. Executives at Avicenna are considering offering these policies for $791 each. Suppose that for each holder of a policy there is a 3% chance that they will die before the age of 70 and a 97% chance they will live to the age of 70. if the executives at Avicenna know that they will sell many of these policies, should they expect to make or lose money from offering them? How much? To answer, take into account the price of the policy and the expected value of the amount paid out to the beneficiary. a. Avicenna can expect to make money from offering these policies. In the long run, they should expect to make ____dollars on each policy sold. b. Avicenna can expect to lose money from offering these policies. In the long run, they should expect to…arrow_forward
- Avicenna, a major insurance company, offers five-year life insurance policies to 65-year-olds. If the holder of one of these policies dies before the age of 70, the company must pay out $21,300 to the beneficiary of the policy. Executives at Avicenna are considering offering these policies for $938 each. Suppose that for each holder of a policy there is a 4% chance that they will die before the age of 70 and a 96% chance they will live to the age of 70. (If necessary, consult a list of formulas.) If the executives at Avicenna know that they will sell many of these policies, should they expect to make or lose money from offering them? How much? To answer, take into account the price of the policy and the expected value of the amount paid out to the beneficiary. Avicenna can expect to make money from offering these policies. In the long run, they should expect to make dollars on each policy sold. Avicenna can expect to lose money from offering these policies. In the long run, they should…arrow_forwardAn asset has a depreciable basis of $13,200 and qualifies as 3-year MACRS property. The MACRS percentages are: 16.67, 33.33, 33.33. and 16.67 percent for years 1 to 4, respectively. What is the year 3 ending book value?arrow_forwardMamma Temte bakes six pies a day that cost $2 each to produce. On 27% of the days she sells only two pies. On 33% of the days, she sells 4 pies, and on the remaining 40% of the days, she sells all six pies. If Mama Temte sells her pies for $4 each, what is her expected profit for a day's worth of pies? [Assume that any leftover pies are given away.] O A. - $8.00 O B. - $7.74 O C. $5.04 O D. $17.04arrow_forward
- In repeated games, players choose their actions... Select one: O a. always simultaneously O b. always sequentially. O c. simultaneously or sequentially.arrow_forwardAvicena, a major insurance company, offers five-year life insurance policies to 65-year-olds. If the holder of one of these policies dies before the age of 70, the company must pay out $265 000 to the beneficiary of the policy. Executives at Avicena are considering offering these policies for $4970 each. Suppose that for each holder of a policy there is a 2% chance that they will die before the age of 70 and a 98% chance they will live to the age of 70. (If necessary, consult a list of formulas.) If the executives at Avicena know that they will sell many of these policies, should they expect to make or lose money from offering them? How much? To answer, take into account the price of the policy and the expected value of the amount paid out to the beneficiary. EC O Avicena can expect to make money from offering these policies. In the long run, they should expect to make pesos on each policy sold. O Avicena can expect to lose money from offering these policies. In the long run, they…arrow_forwardMike, a lumber wholesaler, is considering the purchase of a (railroad) car- load of varied dimensional lumber. He calculates that the probabilities of reselling the load for $10,000, $9000, and for $8000 are 0.22, 0.33, and 0.45 respectively. In order to ensure an expected profit of $3000, how much can Mike pay for the loadarrow_forward
- If the famous insurance company, Lloyd’s of London, insures a $3 million Monet painting for $5000 per year. And, in each year, the painting has a .00021 chance of being stolen according to the Lloyd’s research team? From Lloyd’s perspective, find the expectation for insuring this painting for one yeararrow_forwardThe Texas DOT is comparing two alternative pavement treatments with the following characteristics. For each alternative, estimate the probability to have an annualized construction cost lower than $20k/year. As a result, which alternative would you recommend? The interest rate is 5% per year compounded annually and inflation runs at 2.4% per year. Construction Treatment Service Life Years (probability) Overlay Reconstruction cost/lane-mile $130k $220k 6 (15%) 11 (20%) 7 (25%) 12 (25%) 8 (35%) 13 (35%) 9 (15%) 14 (12%) 10 (10%) 15 (8%)arrow_forwardA company estimates that 1% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $480.If they offer a 2 year extended warranty for $25, what is the company's expected value of each warranty sold?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
MATLAB: An Introduction with ApplicationsStatisticsISBN:9781119256830Author:Amos GilatPublisher:John Wiley & Sons Inc
Probability and Statistics for Engineering and th...StatisticsISBN:9781305251809Author:Jay L. DevorePublisher:Cengage Learning
Statistics for The Behavioral Sciences (MindTap C...StatisticsISBN:9781305504912Author:Frederick J Gravetter, Larry B. WallnauPublisher:Cengage Learning
Elementary Statistics: Picturing the World (7th E...StatisticsISBN:9780134683416Author:Ron Larson, Betsy FarberPublisher:PEARSON
The Basic Practice of StatisticsStatisticsISBN:9781319042578Author:David S. Moore, William I. Notz, Michael A. FlignerPublisher:W. H. Freeman
Introduction to the Practice of StatisticsStatisticsISBN:9781319013387Author:David S. Moore, George P. McCabe, Bruce A. CraigPublisher:W. H. Freeman
MATLAB: An Introduction with Applications
Statistics
ISBN:9781119256830
Author:Amos Gilat
Publisher:John Wiley & Sons Inc
Probability and Statistics for Engineering and th...
Statistics
ISBN:9781305251809
Author:Jay L. Devore
Publisher:Cengage Learning
Statistics for The Behavioral Sciences (MindTap C...
Statistics
ISBN:9781305504912
Author:Frederick J Gravetter, Larry B. Wallnau
Publisher:Cengage Learning
Elementary Statistics: Picturing the World (7th E...
Statistics
ISBN:9780134683416
Author:Ron Larson, Betsy Farber
Publisher:PEARSON
The Basic Practice of Statistics
Statistics
ISBN:9781319042578
Author:David S. Moore, William I. Notz, Michael A. Fligner
Publisher:W. H. Freeman
Introduction to the Practice of Statistics
Statistics
ISBN:9781319013387
Author:David S. Moore, George P. McCabe, Bruce A. Craig
Publisher:W. H. Freeman
Mod-01 Lec-01 Discrete probability distributions (Part 1); Author: nptelhrd;https://www.youtube.com/watch?v=6x1pL9Yov1k;License: Standard YouTube License, CC-BY
Discrete Probability Distributions; Author: Learn Something;https://www.youtube.com/watch?v=m9U4UelWLFs;License: Standard YouTube License, CC-BY
Probability Distribution Functions (PMF, PDF, CDF); Author: zedstatistics;https://www.youtube.com/watch?v=YXLVjCKVP7U;License: Standard YouTube License, CC-BY
Discrete Distributions: Binomial, Poisson and Hypergeometric | Statistics for Data Science; Author: Dr. Bharatendra Rai;https://www.youtube.com/watch?v=lHhyy4JMigg;License: Standard Youtube License