After buying a computer system, Sim Thomas must decide whether to purchase (1) a complete maintenance...

After buying a computer system, Sim Thomas must decide whether to purchase (1) a complete maintenance (or service) policy at a cost of $500, which would cover all maintenance costs; (2) a partial maintenance policy at a cost of $300, which would cover some of the costs of maintenance; or (3) no maintenance policy. The consequences, costs and probabilities are given in the following table:

	MAINTENANCE REQUIRED	NOT REQUIRED
No Service Agreement	$3,000	$0
Partial Service Agreement	$1,500	$300
Complete Service Agreement	$500	$500
Probabilities	0.2	0.8

Using EMV, what do you recommend?

Solutions

Expert Solution

Buy the complete service agreement since it has lowest expected cost

	MAINTENANCE	NOT REQUIRED	EMV
	REQUIRED	NOT REQUIRED
No Service Agreement	$3,000	$0	$600
Partial Service Agreement	$1,500	$300	$540
Complete Service Agreement	$500	$500	$500
Probabilities	0.2	0.8

jeff jeffy answered 1 month ago

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