Homework SourseBurger Prince Restaurant is considering the purchase of a 10
Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy. The fire statistics indicate that in a given year the probability of property damage in a fire is as follows:
Fire Damage
$100,000
$75,000
$50,000
$25,000
$10,000
$0
Probability
.002
.004
.215
.344
.195
.240
Loss
$100,000
$75,000
$50,000
$25,000
$10,000
$5,000
$0
Utility
0
30
60
85
95
99
100
find the expected utility for burger prince.
| Fire Damage | $100,000 | $75,000 | $50,000 | $25,000 | $10,000 | $0 |
| Probability | .002 | .004 | .215 | .344 | .195 | .240 |
Solution
expected utility=
0.02*0 =0
0.004*30=0.12
0.215*60= 12.9
0.344*85= 29.24
0.195*95=18.525
the probability for $5000 is 0 because 0.002+0.004+0.215+0.344+0.195+0.240=1 so this probability is 0
0.240*100=24
expected utility= 24+18.525+ 29.24+12.9+0.12+0
expected utility=84.785
