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Good thought experiment, but I would just add for clarity's sake, the terrorist hiding among the preschoolers is actively shooting at you while hidden behind the children (he's not just sitting there reading a book).
You got to do something right? Would you suggest that you just let the terrorist keep shotting at whoever he likes until he runs out of ammo (assuming he's not being constantly re-supplied by others)?
Do you wait until the terrorist gets bored of shooting?
Do you just move out of the area and let the terrorist have whatever it is he wants and hope that he doesn't follow you (surrounded by children the entire time)?
Do you try to live in the area, just always knowing that you must be covered in head-to-toe armor or just steps away from abunker for the remainder of your life (or the terrorist's life)?
Do you hide in a hole and hope that someone else not directly involved in the craziness steps in and assuages/disarms the terrorist?
What's the answer?