As the buyer for your business, you can choose to buy an extended warranty for each new computer for $200 each. During this period, each computer will experience either a minor ($100) or major ($500) repair bill. Repairs for each computer under warranty are reduced by 50% to $50 or $250. Assume the computer company wants to make as much money as possible, and you wish to spend as little as possible. What is the computer company's optimal strategy?
A) Always sell the warranty.
B) Never sell the warranty.
C) Sell the warranty for less than half of the computers.
D) Sell the warranty for more than half of the computers.

Question

Quizplus · Accepted Answer

If the computer company always sells the warranty, each computer would cost $400 ($200 warranty + $100 minor repair + $100 reduced repair cost) or $700 ($200 warranty + $500 major repair + $250 reduced repair cost) to the buyer, resulting in fewer sales due to high costs. On the other hand, if the company never sells the warranty, buyers may turn to competitors who offer warranties, leading to fewer sales. Therefore, the optimal strategy would be to sell the warranty for less than half of the computers, as this would attract buyers looking for a good deal while also making a profit for the computer company.

As the Buyer for Your Business, You Can Choose to Buy