Scenario 5.5:
Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events:
Scenario Probability Cost
A. No one discovers flaw .15 $0
B. Government fines firm .40 $10 million
(no lawsuits)
C. Resulting lawsuits are lost .30 $12 million
(no government fine)
D. Resulting lawsuits are won .15 $2 million
(no government fine)
-Refer to Scenario 5.5. The expected cost to the firm if it does not fix the car is:
A) $0.
B) $24 million.
C) $7.9 million.
D) $2 million.
E) $3.6 million.

Question

Quizplus · Accepted Answer

The expected cost is calculated by multiplying each scenario's cost by its probability and summing these products: (0.15 * $0) + (0.40 * $10 million) + (0.30 * $12 million) + (0.15 * $2 million) = $0 + $4 million + $3.6 million + $0.3 million = $7.9 million.

Scenario 5.5: Engineers at Jalopy Automotive Have Discovered a Safety Flaw in Flaw