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(52847)   (Show Source):
You can put this solution on YOUR website! .
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?
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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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