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. Which of the following statements is true?
A) The expected cost of not fixing the car is less than the cost of fixing it.
B) The expected cost of not fixing the car is greater than the cost of fixing it.
C) It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are subjective.
D) It is not possible to tell whether the expected cost of fixing the car is less than the cost of fixing it, because the probabilities are not equal.

Question

Quizplus · Accepted Answer

To calculate the expected cost of not fixing the car, we need to multiply the probability of each scenario by its respective cost and then sum them up. 
Expected cost of not fixing the car = (.15 x $0) + (.40 x $10 million) + (.30 x $12 million) + (.15 x $2 million) = $6.9 million
Since the expected cost of not fixing the car is greater than the cost of fixing it ($6.9 million vs. $5 million), it is better to fix the car.

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