Question

Digitalis is a technology company that makes high-end computer processors. Their newest processor, the luteA, is going to be sold directly to the public. The processor is to be sold for $4500 , making Digitalis a profit of $383 . Unfortunately there was a manufacturing flaw, and some of these luteA processors are defective and cannot be repaired. On these defective processors, Digitalis is going to give the customer a full refund. Suppose that for each luteA there is an 11% chance that it is defective and an 89% chance that it is not defective. If Digitalis knows it will sell many of these processors, should it expect to make or lose money from selling them? How much?




To answer, take into account the profit earned on each processor and the expected value of the amount refunded due to the processor being defective.

Answer 1

Answer:

Digitalis should expect to lose money from selling processors.

The amount of loss is $112

Step-by-step explanation:

When the processor is not defective the company has 89% chance of making a profit of $383 per processor.

However,the company has 11% chance of a processor being returned ,as a result the company would not make no gain but would lose its cost of producing the affected processors.

cost per processor=selling price-profit=$4500-$383=$4117

outcome=89%*profit-11%*cost per processor=89%*$383-11%*$4117=-$112