16. Zhi has a netbook worth s35o and a desktop computer worth s1400. The probabi

Question

16. Zhi has a netbook worth s35o and a desktop computer worth s1400. The probability that she'll spill liquid on the desktop is 1/7 and the probability that she'll spill liquid on the netbook is 1/5. These probabilities are independent, and in either case she will have to replace the damaged device. An insurance policy that costs s2o0 will cover the cost of replacing either/both items if they are damaged from a spill. Treat all losses as negative. a. What is the expected value (in dollars) of buying the insurance? b. What is the expected value (in dollars) of declining the insurance?

Explanation / Answer

a) Expected value in declining the insurance =-[ 1/&*350+1/5*1400]=-330

b) Expected value in buying the insurance = -330+200=- 130 dollrs.

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