A decision maker's worst option has an expected value of $1,000, and her best option has an expected value of $3,000. With perfect information, the expected value would be $5,000. The decision maker has discovered a firm that will, for a fee of $1,000, make her position-risk free. How much better off will her firm be if she takes this firm up on its offer

$1000

Explanation:

Expected value of worst payoff (Ew) = $1000

Expected value of best payoff (Eb) = $3000

Expected value with perfect information (Ewpi) = $5000

Expected value of perfect information (Evpi) = $1000

The decision is to choose the options the maximum payoff that payoff of $3000

The benefits of taking the offer - Ewpi - Eb - Evpi = $5000 - $3000 - $1000 = $1000

$1,000

Explanation:

expected value of best case option = $3,000

expected value with perfect information = $5,000

expected value of perfect information = $5,000 - $3,000 = $2,000

cost of perfect information = $1,000

expected gain of perfect information = expected value of perfect information - cost of perfect information = $2,000 - $1,000 = $1,000

(a) when insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

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