Question

After buying a computer system, Sim Thomas must decide whether to purchase (1) a complete service contract at a cost of $1200, which would cover all maintenance costs; (2) a partial service contract at a cost of $600, which would require Thomas to pay the first $1000 of the maintenance and the rest will be covered by the service agreement; or (3) no service contract. The consequences, costs and probabilities are given in the following table:

MAINTENANCE REQUIRED $ 0 500 1000 1500 4000
Probabilities 0.2 0.2 0.3 0.2 0.1

What is you decision if you use the conservative criteria?

Answer 1

To make a decision using a conservative criterion, calculate the worst-case scenario for each option and choose the one with the lowest total cost.

Step-by-step explanation:

To make a decision using a conservative criterion, we consider the worst-case scenario for each option. In this case, the worst-case scenario is the highest cost of maintenance. Let's calculate the total costs for each option:

1. Option 1: Complete service contract cost of $1200
2. Option 2: Partial service contract cost of $600 plus the first $1000 of maintenance cost
3. Option 3: No service contract, so the total cost would be the highest maintenance cost of $4000

Based on these calculations, the decision with the lowest total cost is Option 2.