Question

If the extended warranty on a car costs $200 and average repair bill is $1000, then what is the probability of a breakdown if the company offering the warranty expects to break even?

Answer 1

@reneesonny Let p denote the probability of a breakdown.

The *expected* repair bill is the product of such a repair bill with this probability of it being required, i.e. the probability of a breakdown.

So the expected repair bill is 1000p.

This is what the insurance company *expects* the cost to be on average, i.e. this is its *risk*.

For the company to break even, it has to ensure that the warranty it charges the customer exactly counterbalances this risk.

So we have

1000p = 200, i.e.

p = 200/1000 = 0.2 (= 1/5)

Answer 2

Thanks

Answer 3

welcome