# Question

Four years ago, Victor Consuelo purchased a very reliable automobile (as rated by a reputable consumer advocacy publication). His warranty has just expired, but the manufacturer has just offered him a 5-year, bumper-to-bumper warranty extension. The warranty costs $3,400.

Consuelo constructs the following probability distribution with respect to anticipated costs if he chooses not to purchase the extended warranty.

Cost (in $) ... Probability

1,000 ..... 0.25

2,000 ..... 0.45

5,000 ...... 0.20

10,000 .... 0.10

a. Calculate Victor’s expected cost.

b. Given your answer in part a, should Victor purchase the extended warranty? (Assume risk neutrality.) Explain.

Consuelo constructs the following probability distribution with respect to anticipated costs if he chooses not to purchase the extended warranty.

Cost (in $) ... Probability

1,000 ..... 0.25

2,000 ..... 0.45

5,000 ...... 0.20

10,000 .... 0.10

a. Calculate Victor’s expected cost.

b. Given your answer in part a, should Victor purchase the extended warranty? (Assume risk neutrality.) Explain.

## Answer to relevant Questions

You are considering two mutual funds for your investment. The possible returns for the funds are dependent on the state of the economy and are given in the accompanying table..:.You believe that the likelihood is 20% that ...Let the probability of success on a Bernoulli trial be 0.30. In five Bernoulli trials, what is the probability that there will be (a) 4 failures, (b) more than the expected number of failures?Approximately 76% of baby boomers aged 43 to 61 are still in the workforce (The Boston Globe, July 10, 2008). Six baby boomers are selected at random.a. What is the probability that exactly one of the baby boomers is still ...Assume that X is a Poisson random variable with µ = 1.5. Calculate the following probabilities.a. P(X = 1)b. P(X = 2)c. P(X ≥ 2)According to a recent government report, the aging of the U.S. population is translating into many more visits to doctors’ offices and hospitals (USA Today, August 7, 2008). It is estimated that an average person makes ...Post your question

0