The owner of a small firm has just purchased a personal computer, which she expects will serve her for the next two years. The owner has been told that she "must" buy a surge suppressor to provide protection for her new hardware against possible surges or variations in the electrical current, which have the capacity to damage the computer. The amount of damage to the computer depends on the strength of the surge. It has been estimated that there is a 3% chance of incurring 550 dollar damage, 4% chance of incurring 250 dollar damage, and 14% chance of incurring 50 dollar damage from a surge within the next two years. An inexpensive suppressor, which would provide protection for only one surge, can be purchased. How much should the owner be willing to pay if she makes decisions on the basis of expected value?

Question

Mathematics

Ahmed

29 September, 22:22

The owner of a small firm has just purchased a personal computer, which she expects will serve her for the next two years. The owner has been told that she "must" buy a surge suppressor to provide protection for her new hardware against possible surges or variations in the electrical current, which have the capacity to damage the computer. The amount of damage to the computer depends on the strength of the surge. It has been estimated that there is a 3% chance of incurring 550 dollar damage, 4% chance of incurring 250 dollar damage, and 14% chance of incurring 50 dollar damage from a surge within the next two years. An inexpensive suppressor, which would provide protection for only one surge, can be purchased. How much should the owner be willing to pay if she makes decisions on the basis of expected value?

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Answers (1)

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Joy Khan · Answer 1

Expected value, Ex = $46

Step-by-step explanation:

X ($) : 350 300 150

P (X) : 0.02 0.06 0.14

Expected value, Ex = Σx*p (x)

= $350*0.02 + $300*0.06 + $150*0.14

= $7 + $ 18 + $21

= $46

Therefore, Expected value, Ex = $46