Scenario 17.4
Consider the following information:
StowUrStuff Storage is located slightly below sea level in a coastal town. It could build and maintain a flood control system around its property at an annual cost of $1000, and if it did so, the probability of a flood's doing $1,000,000 in damage during the year would be .005. With no flood control system, the probability of such a flood would be .01.
-Refer to Scenario 17.4. If the flood control system were in place, the firm could insure against a flood for an annual premium of:
A) $5,000.
B) $10,000.
C) $100,000.
D) $200,000.
E) $1,000,000.

Question

Quizplus · Accepted Answer

With the flood control system in place, the probability of a flood causing $1,000,000 in damage is 0.005. Therefore, the expected cost of a flood is 0.005 * $1,000,000 = $5,000. This would be the annual premium for insurance against a flood.

Scenario 17.4 Consider the Following Information