A company estimates that 0.4% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $300.
If they offer a 2 year extended warranty for $46, what is the company's expected value of each warranty sold?
john failed, thanks for the way to figure it out, used it on my online quiz and was wrong.
To calculate the expected value of each warranty sold, we need to multiply the probability of an event occurring by the value associated with that event, and then sum up all the products.
First, let's consider the probability of a product failing after the warranty period but within 2 years of purchase. The company estimates this probability to be 0.4%, which can be written as 0.004.
Next, we need to calculate the replacement cost associated with this event, which is $300.
Now, let's calculate the expected value:
Expected value = (Probability of event occurring) * (Value associated with event)
Expected value of warranty = (0.004) * ($300)
Expected value of warranty = $1.20
Therefore, the company's expected value of each warranty sold is $1.20.