An extended maintenance contract costs $55.

Question

The probability that your device needs repairs 18% and the average cost of repairs for this device is $145 (parts and labor). What is the expected value for this contract? Show all math for this. Would you advise that someone purchase this contract? Show work, show math involved.

Answer 1

E(X) = 0.18(145)-55 = -$28.9

No, since E(X) < 0, on average you save money by just taking your chances by not insuring.