Dear allstat colisters. Recently I was involved in the discussion of the
solving of one binomial exercise. The exercise itself establishes:
"Ten motors are packaged for sale in a certain warehouse. The motors sell
for $100 each, but a double your money back guarantee is in effect for any
defectives the purchaser may receive. Find the expected net gain for the
seller if the probability of any one motor being defective is .08"
This is an application of expected value for binomial distribution, where
the total profits expected are 1,000 and the total losses expected are
0.08*10*200=160. The net gain expected is 840.
The discussion was: this has no practical effect since you never will return
US$160 in case of defective motors. I argued that this is the concept of
expected value, so its have practical effects when your sample is larger.
The issue here is that although we are dealing with a discrete distribution
the specific value of defective (0.08) makes the comprehension of the
expected value a little bit difficult in the context of the exercise.
What would be in your opinion one strong argument to explain the validity of
the concept in this small sample scenario?
Thanks for your cooperation
--
Rodrigo Briceņo
Economist
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