The following questions about decision tree analysis based on the information pr
ID: 343858 • Letter: T
Question
The following questions about decision tree analysis based on the information provided. Cost of the automobile: $18,000.00; Cost of comprehensive insurance to cover auto theft: $1,500.00; Auto theft rate (non recoverable/beyond repair): 0.03; Deductible (lost and/or damaged beyond repair): $1,000.00 a. the payoff for buying this insurance when car is lost, not recovered and/or recovered beyond repair is not $480. O b. the payoff for not buying this insurance when car is lost, not recovered and/or recovered beyond repair is not $540 c. the difference between buying and not buying this insurance is less than $500. d. there are three states for each decision alternative in this problem. e. the payoff for buying this insurance when car is not lost is $17,460. f. the expected value for buying insurance is $16,920 g. the expected value for not buying insurance is not $16,920 h. the payoff for not buying this insurance when car is not lost is not $14,485.Explanation / Answer
a. Payoff for buying this insurance when car is lost, not recovered and/or recovered beyond repair = 0-1500-1000 = -2500
b. Payoff for not buying this insurance when car is lost, not recovered and/or recovered beyond repair = -18000
c. EV of buying insurance = -1500 + (-1000*0.3+0*0.97) = -1530
EV of not buying insurance = -18000*0.03 + 0*0.97 = -540
Difference between buying and not buying this insurance = -1530-(-540) = -990
d. There are two states for each decision alternative - 1) Car is lost/damaged beyond repair 2) Car is not lost/damaged beyond repair
e. Payoff for buying this insurance when the car is not lost = -1500
f. Expected value for buying insurance = -1500 + (-1000*0.3+0*0.97) = -1530
g. Expected value of not buying insurance = -540
h. Payoff for not buying this insurance, when car is not lost = 0
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