1. A CEO is considering buying an insurance policy to cover possible losses incurred by marketing a new product. If the product is a complete failure, a loss of $720,000 would be incurred; if it is only moderately successful, a loss of $162,000 would be incurred. Insurance actuaries have determined that the probabilities that the product will be a failure or only moderately successful are 0.02 and 0.08, respectively. Assuming that the CEO is willing to ignore all other possible losses, what premium should the insurance company charge for a policy in order to break even?

2. You can insure a $16,000 diamond for its total value by paying an annual premium of D dollars. If the probability of loss in a given year is estimated to be 0.02, what is the minimum premium that the insurance company should charge if it wants the expected profit from this insurance policy to equal at least $2,130 annually? D =