(Solved by Humans)-Steve Greene is considering purchasing re insurance for his
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Steve Greene is considering purchasing ?re insurance for his new home. The insurance policy would cost Steve $1,000 and would cover the full cost of all repairs to his house in the event of a ?re. In Steve?s area, the probability of not having a house ?re P(none) = .75, the probability of having a ?re that causes light damage P(light) = .15, and the probability of having a ?re that causes heavy damage P(heavy) = .10. The costs associated with the two decision alternatives and the three states of nature are listed in the table below.
Extent of Fire Damage to Home (cost)
Fire Insurance ???????S1: None ?????S2: Light?? ?????S3: Heavy
D1: Do not buy ??????$0 ????????????????$6,000 ???????????$40,000
?D2: Buy ??????????????????$1,000???????? ?$1,000??????????? ?$1,000
Determine Steve?s optimal decision strategy using the minimal expected regret criterion.
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This question was answered on: 10 May, 2025
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