A town on the Gulf Coast is facing a level-three hurricane. If the mayor calls for an evacuation, then residents will bear a cost of $20 million if the levy protecting the city holds and a cost of $80 million if the levy fails. If the mayor does not call for an evacuation, then residents will bear a cost of zero dollars if the levy holds and a cost of $180 million if the levy fails.

What type of information would you need to collect and analyze to conduct a cost-benefit analysis regarding the evacuation decision?

Given that there is uncertainty about whether the levy will hold, what method(s) would you need to use to determine whether evacuating is the best option or not? How does this method address the uncertainty?

Suppose now that without an engineering inspection of the levy, the mayor estimates that there is a 50 percent chance the levy will hold. An engineering firm could do an inspection prior to the decision of whether to call for an evacuation. The firm can make a definitive determination of whether or not the levy will hold in the face of the level-three hurricane. Unfortunately, there are a number of towns trying to hire the firm before making the decision, so that this town will have to compete for the firms services.

What is the most that the mayor should be willing to bid for the firms services? Why? (Note: It is unlikely that any lives will be lost with or without an evacuation so the mayor is comfortable selecting the course of action that minimizes expected cost.)