A do-it-yourself homeowner is installing a new toilet. While installing the toilet he must decide on what kind of connecting pipe he will install to the water supply. There are two
available options, one that has a shut-off valve in case of a leak and a cheaper one without the shut-of valve. Suppose that the shut-off valve pipe costs an extra ten dollars and that the homeowner must buy one of the two.
a. If the chance of a leak causing household damage is 1%, at what $ amount of household damage is the owner neutral on which pipe to buy?
b. If the cost of a leak would be $10,000 what is the maximum % chance to leak at which the homeowner would prefer to buy the cheaper pipe?
c. If the cost of a leak is $1,000 and the chance to food .1% which pipe should the homeowner buy?