Assume a firm owns a small warehouse. The warehouse is subject to the risk of a fire. Below is the probability distribution for losses:

Loss ($)	P(Loss)
0	0.72
4,300	0.13
8,000	0.08
9,700	0.05
12,500	0.02

The firm has four current risk management options it can use to manage this risk:

[1] Retention with a worry value of $600.

[2] Insurance policy with a face amount (FA) of $8,000, a premium cost of $1,500 and a deductible of 250. Implement a loss prevention program that costs $50 and changes the probability of a $0 loss to 80%, a $4,300 loss to 10%, an $8,000 loss to 6%, a $9,700 loss to 3%, and a $12,500 loss to 1%. This option has a worry value of $450.

[3] Insurance of $12,500 with a premium cost of $2,500.

[4] Insurance policy with a FA of $12,500, a premium of $1,700, and a deductible of 500. This option has a worry value of $50.

1. Construct a loss matrix. What is the expected cost for each option? (16 points)

2. Assume that the risk manager makes decisions based on total cost. What option would she choose? (1 point)