A town along the coast is facing a levelthree hurricane If t

A town along the coast is facing a level-three hurricane. If the mayor calls for an evacuation, then residents will bear a cost of $20 million if the levy protecting the city holds and a cost of $80 million if the levy fails. Assume that there is a 60% chance that the levy will hold and a 40% chance that it will fail. The expected value of the residents’ cost is

Solution

sol)

Let X be the random variable takes

X=$80 million if levy fails

X=$20 millin if levy protecting city holds

Now

X. $80 $20   

P(X) 0.40 0.60

Expected value of the residents’ cost is= sum(X*P(x)

= 80*0.40 + 20*0.60

=44