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1) You are considering buying a three-year warranty for a new air conditioner unit for $350. The warranty will cover the $2,800 replacement cost if the unit breaks down. Suppose the probability that the unit breaks down in the three year period is 8%. Based ONLY on this information, should you buy the warranty?

Respuesta :

Answer:

The expected value is -$126- you should not buy the warranty.

Step-by-step explanation:

You will pay $350 for a warranty that pays $2800, therefore the net value is $2800 - $350.

E(x)= (2800-350)(.8)+(-350)(.92)= -126

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