Donna just paid $800 for a new iPhone. Apple offers a two year extended warranty for $200 and Donna is considering purchasing it. She has utility given by U(X)=√X. Without the extended warranty, the iPhone becomes worthless if it breaks. What is the minimum probability, p, that the iPhone breaks in the next two years that will cause Donna to prefer to purchase the extended warranty? p=_____________ If the probability that her phone breaks is p=0.25, will Donna will prefer to buy or not buy the warranty?

Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.1P
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Donna just paid $800 for a new iPhone. Apple offers a two year extended warranty for $200 and Donna is considering purchasing it. She has utility given by U(X)=√X. Without the extended warranty, the iPhone becomes worthless if it breaks.

What is the minimum probability, p, that the iPhone breaks in the next two years that will cause Donna to prefer to purchase the extended warranty? p=_____________

If the probability that her phone breaks is p=0.25, will Donna will prefer to buy or not buy the warranty?

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