Question

Suppose you are planning to buy a new refrigerator. The fridge comes with a one-

year warranty, but you can purchase a warranty for an additional year of $33. Your
research indicates that in the second year, there is a 1 in 12 chance of incurring a
major repair that costs $150 and a 1 in 20 chance of incurring a minor repair that
costs $55.
What is the expected cost if someone does not buy the warranty?
Your

Answer 1

The expected cost if someone does not buy the warranty is $16.25.

Explanation:

To find the expected cost, we need to consider the probability of different outcomes and multiply them by their corresponding costs. In this case, we have two possible outcomes: no repair needed or a repair needed.

The probability of no repair needed in the second year is 11/12 (since there is a 1 in 12 chance of a major repair). The cost for no repair needed is $0.

The probability of a major repair needed in the second year is 1/12. The cost for a major repair is $150.

The probability of a minor repair needed in the second year is 1/20. The cost for a minor repair is $55.

So the expected cost if someone does not buy the warranty is:

(11/12) x $0 + (1/12) x $150 + (1/20) x $55 = $16.25

This means that on average, someone who does not buy the warranty can expect to pay $16.25 in repairs during the second year of owning the fridge.