SOLUTION: A company estimates that 4% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $500. If they want to o

Question 1206717: A company estimates that 4% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $500.
If they want to offer a 2 year extended warranty, what price should they charge so that they'll break even (in other words, so the expected value will be 0)

Answer by ikleyn(52814) (Show Source): You can put this solution on YOUR website!
.
A company estimates that 4% of their products will fail after the original warranty period
but within 2 years of the purchase, with a replacement cost of $500.
If they want to offer a 2 year extended warranty, what price should they charge so that they'll
break even (in other words, so the expected value will be 0)
~~~~~~~~~~~~~~~~~~~~~~~~

The equation to determine the price of this 2-year extended warranty is

    p = 0.04*500,


and it gives the price of the 2-year extended warranty  p = 20 dollars.    ANSWER

Solved.

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