A company estimates that 0.1% of their products will fail after the original warranty period but within 2 years of the purchase, with a replacement cost of $250. If they offer a 2 year extended warranty for $30, what is the company's expected value of each warranty sold?
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The probability of a product failing after the original warranty period but within 2 years is 0.1%. So, the expected cost of replacing a product without the extended warranty is 0.001 * $250 = $0.25. Show more…
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