For each of the following problems, construct a decision tree AND answer the que
ID: 335710 • Letter: F
Question
For each of the following problems, construct a decision tree AND answer the question at the end. You may do the problems by hand (scan and upload your answers). 1. You were given a lottery ticket. The drawing will be held in 5 minutes. You have a 0.1 percent chance of winning $10,000. A friend just offered you $11 for your ticket. Should you trade your ticket for $11? 2. Your firm, Brisk8, has been sued for $3 million by a customer for breach of contract. Your lawyers believe that there are three possible outcomes if the suit goes to trial. One, which the lawyers term highly improbable 1% is that your supplier will win the lawsuit and be awarded S3 million. Another, which the lawyers term unlikely 24% is that your supplier will win the lawsuit and be awarded $500,000. The third, which the lawyers term likely 75% is that your supplier will lose the lawsuit and be awarded $0. You have to decide whether to try to settle the case. Your customer will settle for $100,000 (and you will have legal fees of $25,000) Should you settle? 3. Your firm, Brisk8, has annual profits of $800 million and cash reserves of $500 million. Your clinics have a replacement value of $200 million, and fire insurance for them would cost $5 million per year. Actuarial data show that your expected losses due to fire are $4 million. The fire insurance will cover all loses. Should you buy insurance?Explanation / Answer
1. Assuming that the ticket was not purchased by me at a price.
Payoff if I sell it for $11 - $11
Payoff if I wait for the lottery = 10000x0.001 = 10
I should sell the ticket, as the payoff is higher in that
2.
Net payoff in case I
-3000000 x0.01 = -30000 - 25000 = -55000
Net payoff in case II
-0.24 x500000 = -120000 - 25000 = -125000
Net payoff in case III
0.75x0 = 0-25000 = -25000
Payoff in case of settlement = -100000
Payoff it the case is contested = -55000-125000-25000 = 205000
We see that settlement is a better option.
3. Since an insurance costs $5 million against a damage which will cost $ 4million if occurs, there is no point in buying it.
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