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For an extra $49 you can buy extended warranty protection on your new HDTV for three years. If the set requires maintenance during that lime, it will be free You estimate that there is a 5% chance that you might need a$300 repair within three years and a 1% chance that you will need a $500 repair, but the chances arc 94% that you will need no repair at all. Based on expected values, should you purchase the extended coverage?
Solution
Verified5% of the customers require a repair, while the extended warranty costs and thus a profit of is then made.
1% of the customers require a repair, while the extended warranty costs and thus a profit of is then made.
94% of the customers do not require a repair, while the extended warranty costs and thus a loss of is then made.
The expected value (or mean) is the sum of the product of each possibility with its probability :
Thus we are expected to make a loss of when purchasing the extended coverage, which implies that we should not purchase the extended coverage.
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