Question

Motowin auto superstore is thinking about offering a two-year limited warranty for $915 on all new cars of a certain model. The terms of the warranty would be that Motowin would replace the car free of charge under certain specified conditions. Replacing the car in this way would cost Motowin $15,700. Suppose that under the warranty, there is a 6% chance that Motowin would have to replace the car one time and a 94% chance they wouldn’t have to replace the car. In the long run, they should expect to make? Dollars on each warranty sold? Expect to lose? Dollar on each warranty?

a) Make $705.50, Lose $15,700.00
b) Make $828.70, Lose $15,700.00
c) Make $789.80, Lose $15,700.00
d) Make $641.40, Lose $15,700.00

Answer 1

To calculate the expected profit or loss from selling the warranty, multiply the probability of each outcome by its corresponding cost.

Step-by-step explanation:

To calculate the expected profit or loss from selling the warranty, we need to multiply the probability of each outcome by its corresponding cost. The probability of not having to replace the car is 94% or 0.94, which would result in a profit of $915. The probability of having to replace the car is 6% or 0.06, which would result in a loss of $15,700. So the expected profit from selling one warranty is:

Expected Profit = (0.94 * $915) + (0.06 * -$15,700) = $857.10 - $942 = -$84.90

Therefore, in the long run, Motowin would expect to lose $84.90 on each warranty sold. The correct answer is d) Make $641.40, Lose $15,700.00.