Question 215035: As a birthday gift, you are mailing a new personal digital assistant (PDA) to your cousin in Toledo.
The PDA cost $250. There is a 2 percent chance it will be lost or damaged in the mail. Is it worth
$4 to insure the mailing? Explain, using the concept of expected value.
Answer by stanbon(75887)   (Show Source):
You can put this solution on YOUR website! As a birthday gift, you are mailing a new personal digital assistant (PDA) to your cousin in Toledo.
The PDA cost $250. There is a 2 percent chance it will be lost or damaged in the mail. Is it worth
$4 to insure the mailing? Explain, using the concept of expected value.
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Let the random variable values represent your money balance.
X = 250-4 = 246 and -250
Corresponding probabilities are 0.98 and 0.02
Your Expected Value is 0.98(246) + (0.02)(-250) = $236
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It is worth it to insure the mailing.
Cheers,
Stan H.
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