Question

B.

Johnson Chemicals is considering two options for its supplier portfolio. Option 1 uses two local suppliers. Each has a "unique-event risk of 4.5%, and the probability of a "super-event" that would disable both at the same time is estimated to be 1.4%. Option 2 uses two suppliers located in different countries. Each has a "unique-event" risk of 14% and the probability of a "super-event" that would disable both at the same time is estimated to be 0.24 %. a) The probability that both suppliers will be disrupted using option 1 is 01600 (round your response to five decimal places). b) The probability that both suppliers will be disrupted using option 2 is(round your response to five decimal places).

Answer 1

a. Option 1 :

Probability of unique event P(U)= 4.5% or 0.045

Probability of super event P(S)= 1.4% or 0.014

Probability that both suppliers will be disrupted, P(D) = P(S) + (1-P(S))* P(U) * P(U)

Probability that both suppliers will be disrupted = probability of super event + probability of both unique events happening at the same time when super event didn't happen.

P(D) = 0.014 + 0.986*0.045*0.045= 0.01600 (round of till 5 decimal places)

b. Option 2 :

Probability of unique event P(U)= 14% or 0.14

Probability of super event P(S)= .24% or 0.0024

Probability that both suppliers will be disrupted, P(D) = P(S) + (1-P(S))* P(U) * P(U)

Probability that both suppliers will be disrupted = probability of super event + probability of both unique events happening at the same time when super event didn't happen.

P(D) = 0.0024 + 0.9976*0.14*0.14= 0.02195 (round of till 5 decimal places)