Laura McCarthy, the owner of Riverside Bakery, has been approached by insurance underwriters trying to convince her to purchase flood insurance. According to local meteorologists, there is a 0.01 probability that the river will flood next year. Riverside€™s profits for the coming year depend on whether Laura buys the flood insurance and whether the river floods. The profits (which take into consideration the $10,000 premium for the flood insurance) for the four possible combinations of Laura€™s choice and river conditions are:

a. If Laura decides not to purchase flood insurance, use the appropriate discrete proba bility distribution to determine Riverside€™s expected profit next year.
b. If Laura purchases the flood insurance, what will be Riverside€™s expected profit next year?
c. Given the results in parts (a) and (b), provide Laura with a recommendation.

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The River Does Not Flood Floods Insurance No Flood $200,000 $1,000,000 Decision Insurance Get Flood Insurance 190,000 $200,000