a. construct the loss matrix for david byrne'. Make sure you show loss in the top row and out-of-pocket cost in the bottom row in each cell of the loss matrix.

b. Assume Reed's worry value for retention without safety (WVr) is $1,200 and his worry value for retention with safety (WVrs) is $700. calculate the total expected cost of each of the four risk management options.

c. If Reed's decision rule is to pick the option that minimizes total expected cost, what risk management option does he choose?

David Byrne Co. owns a warehouse worth $250,000. Lou Reed is the risk manager. David Byrne faces the risk of fire which would completely destroy their warehouse. The probability of a fire is known to be 6%. David Byrne is considering the following risk management options to address the risk of fire to their warehouse: [1] Retention only - no Safety Program [2] Full Insurance Premium = $16,000 [3] Retention + Safety Program [4] Full Insurance + Safety Program Premium = $11,000 The cost of the Safety Program is $4,000. It has the impact of lowering the probability of a fire from 6% to 4%. However, if a fire does occur it is still a total loss. David Byrne Co. owns a warehouse worth $250,000. Lou Reed is the risk manager. David Byrne faces the risk of fire which would completely destroy their warehouse. The probability of a fire is known to be 6%. David Byrne is considering the following risk management options to address the risk of fire to their warehouse: [1] Retention only - no Safety Program [2] Full Insurance Premium = $16,000 [3] Retention + Safety Program [4] Full Insurance + Safety Program Premium = $11,000 The cost of the Safety Program is $4,000. It has the impact of lowering the probability of a fire from 6% to 4%. However, if a fire does occur it is still a total loss