Suppose that a business expects to have profits of $100000 if it is not sued over the coming year. The probability of a suit is 0.04 and the loss if a suit occurs is $250000. The firms tax rate if it earns positive profits is 30%. If it makes negative profits, it pays a 0% rate.

(a) What is the firms before tax expected profit without insurance? and What is its after-tax expected profit without insurance?

(b) What is the firms expected before- and after-tax profit if it purchases a liability insurance policy with full coverage for a premium of $11000 (assume that the premium is a tax-deductible expense)?