Question

A company estimates that 0.2% of their products will fail after the original warranty period but within 2 years the purchase with a replacement cost of $350
IF they offer a 2 year extended warranty for $53 what is the company's expected value of each warranty sold?

Answer 1

www.AssignmentExpert.com

Answer on Question #47642 – Math – Statistics and Probability

A company estimates that 0.2% of their products will fail after the original warranty period but within 2 years the purchase with a replacement cost of $350

IF they offer a 2 year extended warranty for $53 what is the company's expected value of each warranty sold?

Solution

The outcomes are $53 and −($350 − $53) = −$297.

The probabilities of outcomes are 1 − 0.002 = 0.998 and 0.002 respectively.

The company's expected value of each warranty sold is

$$\$53 \cdot 0.998 + (- \$297) \cdot 0.002 = \$52.3.$$

Answer: $52.3.