In the context of Figure 18.3, suppose that the risk involved with the hazardous waste landfill is

Question:

In the context of Figure 18.3, suppose that the risk involved with the hazardous waste landfill is objective. This may be because leaks occur often enough that the probability of a leak can be objectively established. Suppose a bank is willing to loan the municipality money for the water supply with the loan paid off by a payment whose size depends on whether the landfill leaks. The expected value of the payment is equal to the amount loaned. Show on a copy of Figure 18.3, the maximum amount that could be borrowed from the bank to pay for the water supply. Explain.

Figure 18.3

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