00:01
So we're going to look at what happens with these warranties, these two -year warranties, and they expect the warranty to fail .009 or 0 .09.
00:14
That's how often the probability of that happening.
00:17
And we'll talk about what this is in a second.
00:20
That's failing.
00:21
And then it not fails, so they don't have to do anything with the warranty.
00:24
Everything works fine.
00:25
At least people don't call in and try to activate the warranty.
00:29
99 .1 % of the time there's not a problem.
00:33
Now, what happens in the scenario, and x is the amount and the context is, is the company.
00:39
How much does the company, like, earn? well, if this fails, they have to pay out $300 each time.
00:48
If it doesn't fail, they just get to keep that $36 warranty for those two years.
00:53
And those are the only two things that can happen.
00:56
Either nothing happens and they just keep their $36 or something bad happens to an item and they put somebody files a claim and they have to pay out $300.
01:05
So their expected value here is that negative $300 times .009 plus 36 times .991...