An electronics company gives a warrantee on a $150 eReader that covers accidental damage (AD) and theft (T). Due to the costs associated with fixing an eReader, it is cheaper for the company to credit the buyer the full price of the product to purchase another one. In any given year, there is a 5.1% chance that an AD claim is filed. Assume only one claim can be filed (not one of each type). If a customer reports an eReader as stolen, the company will credit the customer 80% of the product's full price. In a given year, there is a 3.5% chance that a T claim is filed. If the warrantee costs $15.95 for one year, what is the company's expected financial gain/loss on each contract? (NOTE: Remember that a customer will pay for the warrantee up-front, whether or not a claim is filed.)
An electronics company gives a warrantee on a $150 eReader that covers accidental
damage (AD) and theft (T). Due to the costs associated with fixing an eReader, it is
cheaper for the company to credit the buyer the full price of the product to purchase
another one. In any given year, there is a 5.1% chance that an AD claim is filed. Assume
only one claim can be filed (not one of each type).
If a customer reports an eReader as stolen, the company will credit the customer 80% of
the product's full price. In a given year, there is a 3.5% chance that a T claim is filed.
If the warrantee costs $15.95 for one year, what is the company's expected financial
gain/loss on each contract?
(NOTE: Remember that a customer will pay for the warrantee up-front, whether or not a
claim is filed.)
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