Assume a firm owns a small warehouse Assume that the warehouse is subject to the risk of a fire.

 A clothing manufacturer is considering the following 4 options to handle the risk they face with the following respective costs

Retention

Expected Cost of 600

Partial insurance

Expected Cost of 800

Deductible insurance

Expected Cost of 900

Full insurance 

Expected Cost of 1000

If the risk manager makes decisions by minimizing TOTAL COST, show what conditions on the WVs would make:

Full insurance preferred to Deductible Insurance? Show all work and explain the numerical answer. (3 points)

Partial insurance preferred to Retention? Show all work and explain the numerical answer. (3 points)

For ease of exposition call the WVs:

WVR (retention)          WVP (partial insurance)         

WVD (deductible insurance)  WVF  (full insurance)

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