If they offer a 2 year extended warranty for $31, what is the company's expected value of each warranty sold?

Question

A company estimates that 0.5% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $250.

If they offer a 2 year extended warranty for $31, what is the company's expected value of each warranty sold?

Answer 1

Explanation :

Given

The outcomes are $31 and -(250-31)$=-219$

The probability outcomes are

1-0.005=0.995

To find

The expected value of each warranty sold is:=

$31*0.995+ $(-219)*0.005

=$30.845- $1.095 =$29.75