A bank is developing policies for deciding whether to accept or deny credit card applications from existing customers. For a specific class of customers, if the bank accepts the application then there is a 95% chance the customer will remain with the bank and a 5% the customer will close (terminate) their account. If the customer’s application is denied, then there is a 50% chance the customer will remain with the bank and a 50% chance the customer will close their account.

Currently, the typical annual profit from a customer whose credit card application has been accepted is $185, while the typical annual profit from a customer whose credit card application has been denied is $250.

a. Explain the cost structure and reasoning for the values.

b. Should the bank accept or decline such applications?

c. What typical annual profit from a customer whose credit card application has been denied is needed in order to reconsider accepting their application?