1 problem found
The maximum height \(X\) of flood water each year on a certain river is a random variable with density function \begin{equation*} {\mathrm f}(x)= \begin{cases} \exp(-x)&\text{if \(x\geqslant 0\),}\\ 0&\text{otherwise}. \end{cases} \end{equation*} It costs \(y\) megadollars each year to prepare for flood water of height \(y\) or less. If \(X\leqslant y\) no further costs are incurred but if \(X\geqslant y\) the cost of flood damage is \(r+s(X-y)\) megadollars where \(r,s>0\). The total cost \(T\) megadollars is thus given by \begin{equation*} T= \begin{cases} y&\text{if \(X\leqslant y\)},\\ y+r+s(X-y)&\text{if \(X>y\)}. \end{cases} \end{equation*} Show that we can minimise the expected total cost by taking \[y=\ln(r+s).\]