Suppose a small fire insurance company insures 100 homes. Each homeowner pays an annual premium of $500. Fires are rare, but occur with probability 1 in 1000 per year. In the event of a fire, the insurance company must pay out $250,000.

1. Show that an expected value decision maker would enter this business.

2. Show that a worst-case scenario decision maker would run screaming in fear from this business.

3. Howmanyyearsmustaninsurancecompanyoperatebeforethe probability of losing money falls below 5%?

4. Howmuchmoneymusttheinsurancecompanyhavehoardedto survive these numbers of years?