Question

Español The Bra Matthew Camera Company has just come out with their newest professional quality digital camera, the Tough Pix 1. The company is selling this camera only through its new mobile app at a profit of $187 per camera. This purchase comes with a guarantee that, barring gross negligence, if the camera breaks in the first two years after purchase, Brady & Matthew will replace it free of charge. Replacing a camera in this way costs the company $4800. Suppose for each Toughpix1 there is a 4% chance that it will need to be replaced exactly once, a 1% chance that it will need to be replaced exactly twice, and a 95% chance that it will not need to be replaced. If Brady & Matthew knows that it will sell many of these cameras, should it expect to make or lose money from selling them? How much? To answer, take into account the profit earned on each camera and the expected value of the cost of replacements of the camera AB O Brady & Matthew can expect to make money from selling these cameras. In the long run, they should expect to make dollars on each camera sold. O Brady & Matthew can expect to lose money from selling these cameras. In the long run, they should expect to lose dollars on each camera sold. O Brady & Matthew should expect to neither make nor lose money from selling these cameras.

Answer 1

Solution

Brad & Matthew can expect to lose money money from selling these cameras.

In the long-run they are expected to makea loss of 101 on each camera sold.

Here,it is given that the replacing the camera will cost them $2400.There is a 95% chance that the camera will not be damaged.

There is a 2% and 5% chance that it will be replaced once and twice respectively.

So,calculating the expected costs we get : (0.04 * 4800 ) + (0.01 * 4800 * 2) i.e., 288

So,the amount of profit the company will be making in the long-run on each camera sold is : (187 - 288 ) i.e., -$101

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