Question

When you buy a set of speakers, best buy asks if you would like to purchase insurance for your speakers. assume that paying for new speakers for customers who listen to music at a reasonable level (thus minimizing damage) costs on average $150, and paying for new speakers for customers who listen to music very loudly (more likely to damage the speakers) costs on average $1000. individual know whether they like music at a reasonable level or at a loud level, but best buy can assume that 40% of listeners are reasonable listeners, and 60% are loud listeners. how much does best buy have to charge in order to break even?

Answer 1

The expected cost of best is equal to the percentage of reasonable listeners * the cost of them + the percentage of loud listeners * the cost of them. In this way, expected cost = $150 * 40% + $1,000 * 60% = $660. Bestbuy should charge its customer this amount to break even.