Suppose You Own a T-Shirt Factory That Can Save Money

question 18

Essay

Suppose you own a t-shirt factory that can save money by illegally dumping dye into a nearby river rather than disposing of it safely. If you illegally dump the dye, there is a 10% chance that it will cause minor environmental damage for which you will have to pay a $10 million fine. There is also a 15% chance that it will cause health damage to citizens for which you will have to pay a $100 million fine.
a. What is the expected value of the amount you will have to pay in fines? ________
Show your work.
b. If you would be willing to pay $20 million for insurance that would cover the cost of these fines if imposed, what is your risk burden associated with illegal dumping? _________
c. Is this firm risk loving, risk neutral, or risk averse (circle one).

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Definitions:

Sell Order

An instruction to a broker to sell a specified quantity of a security at the current market price or at a specific price.

Portfolio Value

The total worth of all the financial assets held by an individual or institution.

Heart Attack

A medical emergency characterized by the death of heart muscle due to the loss of blood supply.

Quarterly Dividend

A distribution of earnings to shareholders, done four times a year, each quarter, by a corporation.