Assumer a firm owns a small warehouse. The warehouse is subject to risk of a fire. Below is the provability distrubution for losses:

Loss($) P(Loss)

0 0.72

3,750 0.13

8,250 0.08

9,500 0.05

11,000 0.02

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

[1] Retention with a worry value of $650

[2] Insurance policy with a face amount (FA) of $13,000, a premium cost of $1,500 and a deductible of 180. Implement a loss reduction program that cost $50 and changes the probability of a $8,250 loss to 10%, a $9,500 loss to 4%, and a $11,000 loss to 1%. All other loss probabilities are kept the same. This option has a worry value of $425.

[3] Insurance of $11,000 with a premium cost of $2,100

[4] Insurance policy with a FA of $11,000, a premium of $1,850, and a deductible of 200. This option has a worry value of $400.

[5] Insurance policy with a face amount (FA) of $11,000, a premium cost of $1,650 and a deductible of 150. Implement a loss prevention program that cost $75 and changes the probability of a $0 loss to 73%, a $3, 75 loss to 14%,a $9,500 loss to 4%, and a $11,000 loss to 1%. The loss of $8,250 stays at 8%. This option has a worry value of $450.

[6] Insurance policy with a FA of $13,000, a premium of $1,700 and a deductible of 175. This option has a worry value of $415.

A} Construct a loss matrix. What is the expected cost for each option? (3 Points each).

B} Assume that the risk manger makes the decisions based on total cost. What option would she choose? (2 Points)