Ron Larson
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Chapter 8 Review Exercises

Chapter 8 Review Exercises
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  • 13. Fire Insurance

    Assume that you are the owner of a home appliance company. You take out a $500,000 fire insurance policy on your factory. The annual premium is $2750. The probability of a fire is 0.005. What is the expected value?

    • Worked-Out Solution

      Notice that this is from the point of view of the policy holder.

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      ______    _____    __   __    _____     _____   
 /_   _//  |  ___||  \ \\/ //  |  ___||  /  ___|| 
 `-| |,-   | ||__     \   //   | ||__   | // __   
   | ||    | ||__     / . \\   | ||__   | \\_\ || 
   |_||    |_____||  /_//\_\\  |_____||  \____//  
   `-`'    `-----`   `-`  --`  `-----`    `---`
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  • 14. Flood Insurance

    Assume that you are the owner of a home appliance company. You take out a $250,000 flood insurance policy on your factory. The annual premium is $3770. The probability of a flood is 0.014. What is the expected value?

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      _____      ___     __   _     _____     _____   
 |__  //    / _ \\  | || | ||  |  ___||  / ____|| 
   / //    | / \ || | '--' ||  | ||__   / //---`' 
  / //__   | \_/ || | .--. ||  | ||__   \ \\___   
 /_____||   \___//  |_|| |_||  |_____||  \_____|| 
 `-----`    `---`   `-`  `-`   `-----`    `----`
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  • 15. Home Appliance Company

    Your company is considering developing one of two toaster models. Use a decision tree to decide which model your company should develop.

    • Worked-Out Solution

      Based on this decision tree, your company has a better expected value by developing toaster A.

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     _    _     ______  __    __    _____             
| |  | ||  /_   _// \ \\ / //  |  ___||   ____    
| |/\| ||   -| ||-   \ \/ //   | ||__    |    \\  
|  /\  ||   _| ||_    \  //    | ||__    | [] ||  
|_// \_||  /_____//    \//     |_____||  |  __//  
`-`   `-`  `-----`      `      `-----`   |_|`-`   
                                         `-`
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  • 16. Home Appliance Company

    Assume that you are the owner of a home appliance company. Your company is considering developing one of two microwave models. Use a decision tree to decide which model your company should develop.

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     _    _    __   __    _  __     ___      _____   
| \  / ||  \ \\/ //  | |/ //   / _ \\   /  ___|| 
|  \/  ||   \ ` //   | ' //   / //\ \\ | // __   
| .  . ||    | ||    | . \\  |  ___  ||| \\_\ || 
|_|\/|_||    |_||    |_|\_\\ |_||  |_|| \____//  
`-`  `-`     `-`'    `-` --` `-`   `-`   `---`
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  • 17. Option Comparison

    Compare the two options.

    • Worked-Out Solution

      Based on this decision tree, option 2 has the greater expected value.

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                 ___      ____      ______    ______  
    ___     / _ \\   |  _ \\   /_   _//  /_   _// 
   /   ||  / //\ \\  | |_| ||   -| ||-     | ||   
  | [] || |  ___  || | .  //    _| ||_    _| ||   
   \__ || |_||  |_|| |_|\_\\   /_____//  /__//    
    -|_|| `-`   `-`  `-` --`   `-----`   `--`     
     `-`
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  • 18. Investment Comparison

    You want to invest $1000. Find the expected values for the two investments.

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      _____     _____    __   __   _    _    __   __  
 / ____||  |  ___||  \ \\/ // | || | ||  \ \\/ // 
/ //---`'  | ||__     \   //  | || | ||   \   //  
\ \\___    | ||__     / . \\  | \\_/ ||   / . \\  
 \_____||  |_____||  /_//\_\\  \____//   /_//\_\\ 
  `----`   `-----`   `-`  --`   `---`    `-`  --`
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    system user
    Jackie (moderator)1 decade ago |
    The worked-out solutions are only available for odd-numbered problems, so unfortunately we cannot show the work for this exercise.
    1
    system user
    Guest   1 decade ago |
    Not sure of the solution
    0
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