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    Determine if I should buy insurance

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    You live near a river that is prone to flooding, so you are considering purchasing flood insurance at $150 per year. You look at storm patterns over the past tenyears and estimate the yearly chance of minor flood damage (approximately $1000 damage) to be 0.01. The chance of moderate damage (approximately $5000 damage) is estimated to be 0.005, and the chance of major damage ($20,000 damage)is estimated to be 0.001. The insurance will cover all damages.

    a. Find the expected yearly cost of flood damage if you purchase flood insurance.

    b. Find the expected yearly cost of flood damage if you do not purchase flood insurance.

    c. Do you think you should purchase the flood insurance? Justify your answer.

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    Solution Preview

    (a) Expected yearly cost of flood damage with insurance = -1000(0.01) ...

    Solution Summary

    The expert determines if they should buy insurance. A complete, neat and step-by-step solution is provided.