Reconsider the extended warranty decision in Example 15-8. Determine the cost of the extended warranty so that the expected costs of the actions to either purchase the warranty or not are equal.
Example 15-8
For deciding whether to purchase an extended warranty on a vehicle, we use the following model. The actions are
a1 = purchase extended warranty
a2 = do not purchase extended warranty
Assume that one of three states corresponding to a major, minor, or no repair can occur during the warranty period. We obtain probability estimates for each state. The states and associated probabilities are
s1 = major repair, probability 0.1
s2 = minor repair, probability 0.5
s3 = no repair, probability 0.4
Finally, the costs Ckm can be presented in a decision evaluation table in which each row is an action and each column is a state. We assume that the extended warranty coverage costs $200. Table 15-12 formally relates the cost of each action and possible future state.
Table 15.12
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