If there is a 2.5% chance that the decision maker's car, valued at $5000, will be totaled during the next year, what is the most that she would be willing to pay each year for an insurance policy that completely covers the potential loss of her vehicle?
Please round all answers (also intermediate results to 2 decimals).

a.
327.28

b.
274.10

c.
99.27

d.
145.47

Question 18
Suppose that a decision maker’s utility as a function of her wealth, x, is given by U(x) = ln (2x) (where ln is the natural logarithm).

The decision maker now has $10,000 and two possible decisions. For Alternative 1, she loses $1000 for certain. For Alternative 2, she gains $500 with probability 0.75 and loses $5,000 with probability 0.25. Which alternative should she choose and what is her expected utility (rounded to 2 decimals)?

a.
She is indifferent between both alternatives.

b.
She should choose Alternative 2. Her expected utility is 9.83.

c.
She should choose Alternative 1. Her expected utility is 9.80.

d.
She should choose Alternative 1. Her expected utility is 9.10.

 
Question 20
A computer chip manufacturer is considering expanding production to meet possible increases in demand. The company's alternatives are to construct a new plant, expand the existing plant, or do nothing in the short run. It will cost them $1 million to build a new facility and $600,000 to expand their existing facility. The market for this particular product may expand, remain stable, or contract. The marketing department estimates the probabilities of these market outcomes as 0.20, 0.50, and 0.30, respectively. The expected revenue for each alternative is presented in the table below.

	MKT expands	MKT stable	MKT contracts
Build new plant	$1,650,000	$1,

Answer rating: 100% (QA)

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