Question: Please help with the answer and methodology behind Part C: Suppose that Mr . William Bell owns a manufacturing facility in Kentucky, which happens to
Please help with the answer and methodology behind Part C:
Suppose that Mr William Bell owns a manufacturing facility in Kentucky, which
happens to be in a seismic zone ie an area where earthquakes tend to happen It is
known that the probability of an earthquake in the area is If there is an
earthquake, the estimated total cost of damage to the facility and to Mr Bell's
business is uniformly distributed between $ million and $ million. There are at
least two options for you to mitigate such a risk. The first option is to retrofit your
facility to make it more resistant to seismic activities. The retrofit will cost $
million. After the retrofit, you estimate that the total cost of damage after an
earthquake would be uniformly distributed between and $ million. The second
option is to relocate your facility to an earthquakefree area, which would completely
eliminate any potential damage due to earthquakes. But the cost will be $ million.
Note: You can ignore the time value of the money when answering the following
questions.
a pts Draw a decision tree for this decision. For the continuous
distributions, please use either the extended PearsonTukey method or the
bracket median method to discretize them. Make sure to write out the
appropriate numbers at appropriate places of the tree.
b pts Please identify all the strategies in the decision tree in Part a Plot the
risk profiles of the strategies, and analyze if there are any deterministic
dominance or firstorder stochastic dominance between the strategies.
c What is the expected value of perfect information in this case?
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