Four years ago Victor Consuelo purchased a very reliable aut

Four years ago, Victor Consuelo purchased a very reliable automobile (as rated by a reputable consumer advocacy publication). His warranty has just expired, but the manufacturer has just offered him a 5-year, bumper-to-bumper warranty extension. The warranty costs $3,400. Consuelo constructs the following probability distribution with respect to anticipated costs if he chooses not to purchase the extended warranty.

Cost (in $)

Probability

900

0.19

2,800

0.48

4,700

0.20

11,000

0.13

Calculate Victor’s expected cost.

Expected cost

Given your answer in part (a), should Victor purchase the extended warranty? (Assume risk neutrality.)

	No
	Yes

Consider the table:

Thus, his expected cost is $3885. [ANSWER]

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b) As this is greater than the cost of waranty, then YES, HE SHOULD PURCHASE THE WARRANTY.

x	P(x)	x P(x)
900	0.19	171
2800	0.48	1344
4700	0.2	940
11000	0.13	1430

Four years ago, Victor Consuelo purchased a very reliable automobile (as rated by a reputable consumer advocacy publication). His warranty has just expired, but

Four years ago Victor Consuelo purchased a very reliable aut

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