Question

If Motown knows that it will sell many of these warranties, should it expect to make or lose money from offering them? How much?

Answer 1

We will have the following:

We know that there is a 7% chance that they would need to pay the car; that means that for each 100 people that pay the warranty 7 would need to be paid for it; so the total amount obtained from 100 people would be:

$T=100(983)-7(13400)\Rightarrow T=4500$

Now, from this we can determine the total amount of money gained from each warranty sold by dividing by the total of the hypothetical sales; in our case 100, that would be:

$x=\frac{4500}{100}\Rightarrow x=45$

So:

MotoWin can expect to make money from offering these warranties.

In the long run, they should expect to make 45 dollars on each warranty sold.