Question 313857: As a birthday gift, you are mailing a new personal digital assistant 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 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 random number "x" be value to the purchaser.
Random Number Values: -4 , +246
Corresponding Probs:: 0.98, 0.02
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E(x) = 0.98(-4)+ 0.02*246
= -3.80 + 4.92
= $1.12
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The expected value is positive so it is a good buy.
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Cheers,
Stan H.
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