Exercise 5-24 Algo Four years ago, Victor purchased a very reliable automobile (as rated by...
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Exercise 5-24 Algo Four years ago, Victor purchased a very reliable automobile (as rated by a reputable consumer advocacy publication). His warranty has just expired, but the manufacturer has just offered hima 5-year, bumper-to- bumper warranty extension. The warranty costs $3,600. Victor constructs the following probability distribution with respect to anticipated costs if he chooses not to purchase the extended warranty. Cost (in S) 1,400 2,100 5,100 9,100 Probability 0.25 0.48 0.18 0.09 a. Calculate Victor's expected cost. Expected cost b. Given your answer in part (a), should Victor purchase the extended warranty? (Assume risk neutrality.) Yes No
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