a) The owner of a small firm has just purchased a personal computer, which she e

Question

a) 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, 6% chance of incurring 150 dollar damage, and 13% 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?

b) 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, 6% chance of incurring 150 dollar damage, and 13% 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?

c) Consider the following game of chance based on the spinner below: Each spin costs $3. If the spinner lands on B the player wins $9, if the spinner stops on A the player wins a nickel otherwise the player wins nothing. Calculate the players expected winnings. Express your answer to at least three decimal places in dollar form.

Explanation / Answer

a)

Expected Value = 0.03*$550 + 0.06*$150+0.13*$50 = $32

Therefore the owner should be willing to pay $32 if she makes decision based on expected value.

c)

The Expected value would be given by,

E = (1/9)*$9+(1/3)*($1/20) - $3 = -$1.983

Hence the players expected winnings would be -$1.983

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.