Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industries doesn't purchase the insurance and minor fire damage occurs, a cost of $100,000 is anticipated; the cost if major or total destruction occurs is $200,000. The costs, including the state-of-nature probabilities, are as follows:

a. Using the expected value approach, what decision do you recommend?
b. What lottery would you use to assess utilities? (Because the data are costs, the best payoff is $0.)
c. Assume that you found the following indifference probabilities for the lottery defined in part (b). What decision would you recommend?
Cost Indifference Probability
10,000 .........p = 0.99
100,000 .......p = 0.60
d. Do you favor using expected value or expected utility for this decision problem?Why?

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Damage None s 10,000 Minor s 10,000 100,000 0.03 Decision Alternative Purchase insurance, d Do not purchase insurance, d Probabilities Major s, 10,000 200,000 0.01 0 0.96