1. You want to decide whether or not to take the freeway or surface streets home after work. From experience, you calculate that if you take the freeway, you will either speed home, which you rate at a utility of + 8 on the happiness scale, or you will get into a traffic jam, which you rate at a utility of - 6. If you take surface streets, you will either get home okay, which is a utility of + 4 (since it will take twice as long) or you will hit traffic, which you rate as a - 6. The probability of traffic on the freeway is 60%. The probability for getting home okay on the side streets is 50%.

Exp(F) = (2 pts.)

Exp(S) = (2 pts.)

b) If you are following the Expected Value Rule, which should you take? __________________ (1 pt.)

2. You take out a fire insurance policy on your home. The annual premium is $300. In case of fire, the insurance company will pay you $200,000. The probability of a house fire in your area is 2% (or .02).

a) What is the expected value? (2 pts.)

b) What is the insurance company's expected value? (1 pt.)

c) Suppose the insurance company sells 100,000 policies. What can the company expect to earn? (2 pts.)

Extra Credit (1 pt.)

A brilliant but rather self-centered bachelor probability theorist drove for years without any automobile insurance whatsoever. When he married and began to raise a family he took out ample automobile insurance. Explain his actions.