expected value decision maker

[BJazz]

You are debating whether or not to purchase an extended warranty on a new $500 video camera if it should fail. The warranty costs $75. How likely would you have to believe failure of the video camera is to make the purchase of the warranty worthwhile, assuming you are an expected value decision maker?

I think I know who to do this, but does anyone know what effect "expected value decision maker" has on it. Thanks

 

[galactus]

I would think that since the warranty costs 15% of the value of the camcorder, then the probability of it breaking would have to be \(\displaystyle \geq{15%}\)

Extended warranties are pretty much a rip off. Less than 50% goes to the insurance company which underwrites the warranty, the other portion goes in the retailers pocket.

 

[BJazz]

This is what I'm thinking...feedback/
Probability of saving or losing money on the warranty:

P=.7 P=.2 P=.1
Works Needs fixing Breaks
Buy the warranty (E) -75 25 600
Don't buy the Warranty(e) 0 -100 -500

E = 0.7(-75) + 0.2(25) + 0.1(600) = 12.5
e = 0.7(0) + 0.2(-100) + 0.1(-500) = -70

You should go with the warranty for $12.50
With no warranty you lose $70