Question

The cost of a piece of machinery is $1,750 if supplied by company A and $1,680 if supplied by company B. Company A's contract offers unlimited repairs for $25 per month. Company B's contract charges $150 per repair. The table lists the probabilities of the number of repairs required by company B's machinery during one year. Number of Repairs 0 1 2 3 Probability 0.25 0.41 0.22 0.12 Based on the data provided, which statement about the total cost for one year is true?

Answer 1

hat is the expected number of repairs
E[r] = 0.25 * 0 + 0.41 * 1 + 0.22 * 2 + 0.12* 3
= 0.41 + 0.44 + 0.36
= 1.21

Company A is offering unlimted repairs for 25 / month = 300 / year
company B is offering 150 per repair * 1.21 expected number of repairs / year = expected 181.5
A wants more up front and more over the course of the year for maintenance.
B is the better deal... But, A does give you certainty, which is worth something to some people.

Answer 2

PLATO ANSWER:

C.

The offer from company B, with the repair contract, is more cost effective than company A's offer.