Consider Two Insurance Companies

Consider two insurance companies. Insurance Company A insures homes in Florida against hurricane damage. Insurance Company B insures homes in Oklahoma against tornado damage. Suppose that in the next year, there is a 20 percent chance that Florida will be hit by a devastating hurricane. If it does, Company A will lose $3 million. If no hurricane hits Florida, Company A will earn $5 million in profits. Suppose that also in the next year, there is a 10 percent chance that Oklahoma will be hit by a devastating tornado. If it does, Company B will lose $2 million. If there is no tornado, Company B will earn $4 million in profits.Now suppose that these two companies are considering a merger. If they merge, they will split their profits or losses equally. The potential outcomes and their probabilities are as follows:72 percent chance of neither a hurricane nor a tornado occurring;18 percent chance of a hurricane occurring, but not a tornado;8 percent chance of a tornado occurring, but not a hurricane;2 percent chance of both a tornado and a hurricane occurring.Which of the following statements is true?

A) Because the merged company will insure against more events, it faces more risk.
B) Company A will benefit from this merge, but Company B will not.
C) If the companies merge, the expected value of each company's earnings is $3,400,000.
D) If the companies do not merge, the expected value of Company A's earnings is $4,600,000.