1: Ellis Company owns a small office building worth $300,000. Cameron is the risk manager. Ellis faces the risk of fire which would completely destroy their building. The probability of a fire is known to be 3%.

Cameron is considering the following risk management options to address the risk of fire to their building:

a. Retention

b. Full Insurance for a premium of $10,000

c. Safety Program & Retention

d. Safety Program & Full Insurance (premium falls to $8,000)

The cost of the Safety Program is $1,500. It has the impact of lowering the probability of a fire from 3% to 2%. However, if a fire does occur, it is still a full loss.

Imagine the federal government instituted a $1000 mandate" for full insurance. That is, Ellis Company must pay a penalty of $1000 if they do not purchase full insurance. How would this affect Cameron's PMAX?

Please explain how to solve this