You work for an insurance company and you need to set price on a two-year warranty...

You work for an insurance company and you need to set price on a two-year warranty policy. The item of interest is a Dutch oven. Your boss wants the policy to generate $9 of profit. You do some research and find that with probability 0.1 the lid will need to be replaced and that will cost the company $80, and with probability 0.05 the pot will need to be replaced and that will cost the company $150. What should the price of the warranty be? Please show work.

Expert Solution

Cost of replacement = 0.1*$80+ 0.05*$150

Cost of replacement = 8 + 7.5

Cost of replacement = $15.5

Now profit = $9

Price of policy = Cost of replacement + Profit

Price of policy = 15.5 + 9 = $24.5

orchestra answered 2 years ago

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