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Tom wants to avoid any accidents on the work floor of his factory.If an accident does occur,it would cost him $500,000 in damages.Installing safety equipment would decrease the probability of an accident occurring from 20% to 10%.However,the equipment costs $20,000 to install.
-What is his expected loss after installing the safety equipment
A)$20,000
B)$50,000
C)$100,000
D)$125,000

Question

​Use the following setup for question
Tom wants to avoid any accidents on the work floor of his factory.If an accident does occur,it would cost him $500,000 in damages.Installing safety equipment would decrease the probability of an accident occurring from 20% to 10%.However,the equipment costs $20,000 to install. 
-​What is his expected loss after installing the safety equipment
A)​$20,000
B)$50,000
C)$100,000
D)​$125,000

Quizplus · Accepted Answer

Without the safety equipment:
Expected loss= $500,000 x 0.2= $100,000
With the safety equipment:
Expected loss= $20,000 (cost of equipment) + $500,000 x 0.1= $70,000
Therefore, by installing the safety equipment, Tom can reduce his expected loss from $100,000 to $70,000, resulting in a savings of $30,000. Thus, the best choice is to install the safety equipment.

​Use the Following Setup for Question

Use the Following Setup for Question