Rent-to-own (RTO) stores allow consumers immediate access to merchandise in exchange for a series of weekly or monthly payments. The agreement is for a fixed time period. At the same time, the customer has the flexibility to terminate the contract by returning the merchandise. Suppose the RTO store makes a $200 profit on appliances when the customer ends up owning the merchandise by making all payments. It makes a $20 profit when the customer returns the product and a loss of $600 when the customer defaults. Let the return and default probabilities be 0.60 and 0.05, respectively.
a. Construct a probability distribution for the profit per appliance.
b. What is the expected profit for a store that sells 200 rent-to-own contracts?

  • CreatedJanuary 28, 2015
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