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Probability - Computing expected values and Decision Making

There is a probability that the river will flood next year. Riverside's profits for the coming 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:

The River

Does Not
Flood Floods

Insurance No Flood
Decision Insurance $200,000 $1,000,000
Get Flood
Insurance $190,000 $200,000

a. If Laura decides not to purchase flood insurance, use the appropriate discrete probability distribution to determine Riverside's expected profit next year.

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.

Solution Summary

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