Suppose you work for a company that manufactures electronics. The development an

Question

Suppose you work for a company that manufactures electronics. The development analysts estimate that 5% of their flagship product will fail within 2 years of the purchase date, with a replacement cost of $ 1400.

A newly hired associate at the company proposes to charge $ 62 for a 2 year warranty.

a. Compute the expected value of this proposal. Let X be the amount profited or lost (by the company) on the warranties and P(X) is the probability. E=E=

b. Interpret the expected value in complete sentences.

Explanation / Answer

a) here  expected value of this proposal =E(saving )-charge of warranty =0.05*1400-62=$8

b)exepcted value should not be confused with saving on single item.

here expected value $8 is average value that comany is supposed to save per item if they insure a large number of ther products under this scheme.

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