SOLUTION: Abby is purchasing a new phone for $150. Optionally, she can also purchase a warranty at an additional cost of $20. With the warranty, Abby can get the phone replaced for free, s

Question 1181097: Abby is purchasing a new phone for $150. Optionally, she can also purchase a warranty at an additional cost of $20. With the warranty, Abby can get the phone replaced for free, should it ever break. If there’s a 9% probability that the phone will break during the time that she owns it, what is the expected value of the warranty?
Answer by ikleyn(52852) (Show Source): You can put this solution on YOUR website!
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Abby is purchasing a new phone for $150. Optionally, she can also purchase a warranty at an additional cost of $20.
With the warranty, Abby can get the phone replaced for free, should it ever break.
If there’s a 9% probability that the phone will break during the time that she owns it,
what is the expected value of the warranty?
~~~~~~~~~~~~~~~~~

The expected value is   E = 0.09*150 - 20 = -6.5 dollars.



It means that the average insured customer pays  $6.50  to the insurance company for "peace in his or her mind".

Solved, answered and carefully explained.

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