According to a new report from the United Nations' Intergovernmental Panel on Climate Change, hurricanes are becoming stronger, rainfalls are heavier and flood risk is higher. Living in an area that is somewhat close to the coast, you consider purchasing flood insurance for your home for this year. In your area, the cost of flood insurance is $772. If you are hit by a major flood, your anticipated costs for repair is $200,000. A minor flood in your area will result in an estimated repair cost of $30,000. If you choose to purchase flood insurance, it will cover the cost of damage up to $180,000. a. Develop a payoff table for this situation. What decision should you make using each strategy? i. Aggressive (Optimistic) ii. Conservative (Pessimistic) iii. Opportunity Loss

According to a new report from the United Nations' Intergovernmental Panel on Climate Change, hurricanes are becoming stronger, rainfalls are heavier and flood risk is higher. Living in an area that is somewhat close to the coast, you consider purchasing flood insurance for your home for this year. In your area, the cost of flood insurance is $772. If you are hit by a major flood, your anticipated costs for repair is $200,000. A minor flood in your area will result in an estimated repair cost of $30,000. If you choose to purchase flood insurance, it will cover the cost of damage up to $180,000. a. Develop a payoff table for this situation. What decision should you make using each strategy? i. Aggressive (Optimistic) ii. Conservative (Pessimistic) iii. Opportunity Loss

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

According to a new report from the United
Nations' Intergovernmental Panel on
Climate Change, hurricanes are becoming
stronger, rainfalls are heavier and flood risk
is higher. Living in an area that is somewhat
close to the coast, you consider purchasing
flood insurance for your home for this year.
In your area, the cost of flood insurance is
$772. If you are hit by a major flood, your
anticipated costs for repair is $200,000. A
minor flood in your area will result in an
estimated repair cost of $30,000. If you
choose to purchase flood insurance, it will
cover the cost of damage up to $180,000.
a. Develop a payoff table for this situation.
What decision should you make using each
strategy?
i. Aggressive (Optimistic) ii. Conservative
(Pessimistic) ii Opportunity Loss

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Step 3: Ascertain best alternative under aggressive strategy

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Step 4: Ascertain best alternative under conservative strategy

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Step 5: Ascertain best alternative under opportunity loss strategy

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