SOLUTION: Suppose the warranty period on your family's new computer is about to expire and you are debating about whether to buy a one-year maintenance contract for $130. If you buy the cont
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Question 1171280: Suppose the warranty period on your family's new computer is about to expire and you are debating about whether to buy a one-year maintenance contract for $130. If you buy the contract, all repairs for one year are free. Consumer information shows that 23% of the computers like yours require an annual repaid that costs $320 on the average. What is the expected value of buying the maintenance contract?
Answer by ikleyn(52779) (Show Source): You can put this solution on YOUR website!
.
Your expected value of buying the maintenance contract is
0.23*320 - 130 dollars = -56.40 dollars.
In wording form :
If you do not buy the contract, then with the probability of 0.23 you will be forced to pay $320 for repair, which is $73.60.
If you do buy the contract, you pay $130 for contract, avoiding the fees for repair.
In other words, buying the contract, you give them $130, but avoid to lose $73.60.
So, you pay $56.40 dollars to the insurance company for your "peace in mind".
$56.40 is the profit of the insurance company - it is for what they established their business.
ANSWER. Your expected value of buying the maintenance contract is -56.40 dollars.
Notice the sign " - " before the number.
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