For the car-rental decision in Problems 3 and 10, suppose that the cost of a min
ID: 2928382 • Letter: F
Question
For the car-rental decision in Problems 3 and 10, suppose that the cost of a minor fender bender is normally distributed with a mean of $2000 and standard deviation of $100, and the cost of a major accident is triangular with a minimum of $10,000, maximum of $25,000, and most likely value of $16,000. YOU MUST USE Analytic Solver Platform to simulate the decision tree and find the distribution of the expected value of not taking the insurance. Please show detailed steps while using analytic solver
Problem 3:
Suppose that a car-rental agency offers insurance for a week that costs $75. A minor fender bender will cost $2,000, whereas a major accident might cost $16,000 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. The uncertain consequences, or events that might occur, are that you would not be involved in an accident, that you would be involved in a fender bender, or that you would be involved in a major accident. Develop a payoff table for this situation. What decision should you make using each strategy?
a aggressive strategy
b conservative strategy
c opportunity-loss strategy
Problem 10:
For the car-rental situation described in Problem 3, assume that you researched insurance industry statistics and found out that the probability of a major accident is 0.05% and that the probability of a fender bender is 0.16%. What is the expected value decision? Would you choose this? Why or why not?
Explanation / Answer
Aggressive strategy - This strategy is for taking high degree of risk. Aggressive strategy has an ability to take risks. So, as per this case, the decision as per aggressive strategy is - Do not buy the insurance. Since the probability of facing/meeting an accident is very low. So, this strategy will take high risk by not taking the insurance.
2) Conservative strategy - This strategy is an investment strategy. Conservative strategy has an ability to invest. So, as per the case, the decision as per conservative strategy is - buy a new car if there is a major accident. Buying a car is better than buying an insurance. Investment is given prime importance in conservative strategy. Hence the risk is very low.
3) Opportunity-loss strategy - This strategy is a derivative of lost opportunity. Opportunity strategy will not take risk. It will grab the opportunity. Since the car-rental agency is offering an insurance, the decision as per opportunity loss is to take the insurance instead of taking risk.
b, expected value is $75 and $11.2