The answer is 1.26 but how? A light bulb manufacturer introduces a new product.

Question

The answer is 1.26 but how?

A light bulb manufacturer introduces a new product. The firm believes that there is a(n) 86 percent of the bulbs functioning as advertised. The firm's engineering department tests a random sample of bulbs. In the past, testing returned a positive result 86 percent of the time when bulbs actually functioned properly (as advertised). Further, if the bulbs failed to work as advertised, testing returned a negative result 93 percent of the time. If the bulb works as advertised, the firm will earn $3.7 in profit. If the fail to work as advertised, the firm will lose $1. Calculate the expected value of the bulb given a negative test result. Round your answer to two decimal places.

Explanation / Answer

93 percent of the time the firm will earn 3.7 profit if the bulb work as advertised and if it did not 7 percent of 3.7 profit

So, the expected value of the bulb = 3.7*0.07= 0.259+1=1.26

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