Concept explainers
Laura McCarthy, the owner of Riverside Bakery, has been approached by insurance underwriters trying to convince her to purchase flood insurance. According to local meteorologists, there is a 0.01probability that the river will flood next year. Riverside’s profits for thecoming year depend on whether Laura buys the flood insurance and whether the river floods. The profits (which take into consideration the $10,000 premium for the flood insurance) for the four possible combinations of Laura’s choice and river conditions are:
a. If Laura decides not to purchase flood insurance, use the appropriate discrete
b. If Laura purchases the flood insurance, what will be Riverside’s expected profit next year?
c. Given the results in parts (a) and (b), provide Laura with a recommendation.
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