Statistics 260 question: please please help

Jun 25th, 2014
Price: $5 USD

Question description

An extended warranty is a prolonged warranty offered to consumers by the warranty administrator, the retailer, or the manufacturer.  A recent report in The New York Times (November 23, 2009) suggests that 20.4% of laptops fail over three years.  Roberto D'Angelo is interested in an extended warranty for his laptop.  A good extended warranty is being offered at for $74.  It will cover any repair job that his laptop may need in the next three years.  Based on his research, he determines that the likelihood of a repair job in the next three years is 13% for a minor repair, 8% for a major repair, and 3% for a catastrophic repair.  The extended warranty will him $80 for a minor repair, $320 for a major repair, and $500 for a catastrophic repair.  These results are summarized in the following probability distribution.

Type of Repair Probability Repair Cost
None 0.76 $0
Minor  0.13 $80
Major 0.08 $320
Catastrophic 0.03 $500

In a report, use the above information to:

1. Calculate and interpret the expected value of the repair cost.

2. Analyze the expected gain of loss for a consumer who buys the above extended warranty.

3. Determine what kind of a consumer (risk neutral, risk averse, or both) will buy this extended warranty.

Tutor Answer

(Top Tutor) Daniel C.
School: Duke University

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