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)
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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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