Question: PLEASE SHOW WORK AND HOW TO DO ! Thank you You live in an area that has a possibility of incurring a massive earthquake, so
PLEASE SHOW WORK AND HOW TO DO ! Thank you
You live in an area that has a possibility of incurring a massive earthquake, so you are considering buying earthquake insurance on your home at an annual cost of $180. The probability of earthquake damaging your home in one year is 0.001. If this happens, you estimate that the cost of the damage (fully covered by earthquake insurance) will be $160,000. Your total assets including your home are worth $250,000. Also, you can check your house to see if it is earthquake safe or not for the cost of $50. Assume that the test is valid for one year and its result is not valuable after one year. From the historical data you know that the probability that a house which is damaged has been reported to be earthquake safe is 10%. Also, you know that the probability that a not damaged house has been reported not to be earthquake safe is 30%.
- Develop a decision analysis formulation of this problem by identifying the decision alternatives, the states of nature, and the payoff table when the earthquake safety check is not conducted.
- Assuming the earthquake safety check is not conducted, which alternative would you chose to minimize your maximum regret?
- Assuming the earthquake safety check is not conducted, use Bayes decision rule to determine which decision alternative should be chosen.
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