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Flight insurance. You are booking international flights for a holiday. The cost of a non- undable flight is $1,000 but you have the option to buy insurance for an additional $200. The urance policy will re-imburse the cost of the flight if you need to cancel due to unforeseen cumstances. You estimate there is a 25% chance that you will have a need to cancel your

Flight insurance. You are booking international flights for a holiday. The cost of a non- undable flight is $1,000 but you have the option to buy insurance for an additional $200. The urance policy will re-imburse the cost of the flight if you need to cancel due to unforeseen cumstances. You estimate there is a 25% chance that you will have a need to cancel your

A First Course in Probability (10th Edition)
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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4 Flight insurance. You are booking international flights for a holiday. The cost of a non- refundable flight is $1,000 but you have the option to buy insurance for an additional $200. The insurance policy will re-imburse the cost of the flight if you need to cancel due to unforeseen circumstances. You estimate there is a 25% chance that you will have a need to cancel your flight. (a) Draw a decision tree. (Use negative numbers to describe costs in this problem.) (b) What is the best decision and the expected return? (c) Draw the "flipped" tree and calculate the EVPI. (d) Explain what EVPI means in this case.
Transcribed Image Text:4 Flight insurance. You are booking international flights for a holiday. The cost of a non- refundable flight is $1,000 but you have the option to buy insurance for an additional $200. The insurance policy will re-imburse the cost of the flight if you need to cancel due to unforeseen circumstances. You estimate there is a 25% chance that you will have a need to cancel your flight. (a) Draw a decision tree. (Use negative numbers to describe costs in this problem.) (b) What is the best decision and the expected return? (c) Draw the "flipped" tree and calculate the EVPI. (d) Explain what EVPI means in this case.
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