Draw a decision tree for situation

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Reference no: EM132737746

You are planning to rent a car for one week. Suppose a car rental agency offers insurance that costs $10 per day. A minor fender bender will cost $1500, whereas a major accident might cost $15,000 in repairs. Without the insurance, you would be personally liable for any damages. What should you do? Clearly, there are two decision alternatives: take the insurance, or do not take the insurance.

a) Draw a decision tree for this situation.

b) Suppose there is a 2% chance of a major accident and a 15% chance of a minor fender bender. Add this probability information to your tree above and solve the decision tree. What would an expected value decision maker do?

c) Assume the probability of a major accident will never exceed 10%. Demonstrate using 2 sensitivity graphs (one assuming the probability of major accident is 0% and the other assuming it is 10%) whether or not it would ever make sense to self-insure.

Should you ever self-insure? YES NO

Reference no: EM132737746

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