The best expected decision is d2.
The equation for the expected value for the lottery will be 200000 - 20000P
<h3>How to calculate the decision?</h3>
The expected value for d1 will be:
= 10000(0.96) + 10000(0.03) + 10000(0.01)
= 10000
The expected value for d2 will be:
= 0(0.96) + 100000 (0.03) + 200000 (0.01)
= 5000
Therefore, the best expected decision is d2.
b. The best outcome is 0 and the worst is given as -200000. Therefore, the expected value for the lottery will be:
= P + 200000(1 - P)
= 200000 - 20000P
Therefore, the best expected decision is d2 and the equation for the expected value for the lottery will be 200000 - 20000P.
Learn more about <em>insurance</em> on:
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Alexander Industries is considering purchasing an insurance policy for it's new office building in St. Louis, Mo. 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 a major fire or total destruction occurs is $200,000. The cost, including state of nature possibilities are as follows:
Damage
decision alternative none s1 minor s2 major s3
purchase insurance d1 $10,000 10,000 10,000
Do not purchase insurance d2 0 100,000 200,000
probabilities .96 .03 .01
a. using the expected values approach, what decision do you reccommend?
b. What lottery would you use to access utilities?
