A company estimates that 1% of their products will fall after the original warranty period but within 2 years of the purchase, with a replacement cost of $480.
If they want to offer a 2 year extended warranty, what price should they charge so that they'll break even (in other words,
so the expected value will be 0)
(round to the nearest cent)

They should charge a price of $4.85 so that they'll break even.

Step-by-step explanation:

The expected value will be the sum of the net values multiplied by it's probabilities.

1% of their products will fall after the original warranty period but within 2 years of the purchase, with a replacement cost of $480.

So in 1% = 0.01 of the cases, the company loses $480. That is, a net value of -480.

In 99% = 0.99 of the cases, the company makes x.

The expected value is 0.

We have to find x.

So

They should charge a price of $4.85 so that they'll break even.

step-by-step explanation: yes