Question

If Digitalis knows it will sell many of these processors, should it expect to make or lose money from selling them? How much? To answer, take into account the profit earned on each processor and the expected value of the amount refunded due to processors being defective

Answer 1

Digitalis can expect to make money from selling these processors.

In the long run, they should expect to make 52.68 dollars in each processor sold

Explanation

The expected value is calculated by multiplying each of the possible outcomes by the likelihood that each outcome will occur and then summing all of those values.

In this case, we have:

• probability that the processor is not defective: 0.87 (= 87/100)

,

• company's earning if the processor is not defective: $464 (company's profit)

,

• probability that the processor is defective: 0.13 (= 13/100)

,

• company's earning if the processor is defective: -$2700 (the negative sign indicates that the company will lose money in this case)

Therefore, the expected value is:

`\begin{gathered} E=0.87*464+0.13*(-2700) \\ E=\text{ \$}52.68 \end{gathered}`