An easy decision for a statistician

I went to Radio Shack the other day and bought a telephone answering machine.

Q: Did I want to buy the extended warranty for $5.99? [Students: figure this one out before continuing…]

A: No.

3 thoughts on “An easy decision for a statistician

  1. Ah, yes, another lecture example. Assume exponentially distributed lifetimes for electronic equipment (especially things with no hard drives, not running Windows). If the warranty is for 2 years, and the manufacturer expects 1% of the products to fail during the warranty period, what proportion of the products will fail in 4 years?

    Then, after a few more lectures, postulate a more clever manufacturer with Weibull-distributed lifetimes…and assign this one as homework!

  2. probably an even easier question for an economist.

    on a sidenote; there are entire segments of appliance manufacturers that have their entire profits in the extended warranty.

  3. My favorite example in this genre:

    When you make a phone call and the line is busy and the message comes on "For only 75 cents, ATT will redial this number for you."

    If it takes 5 seconds to dial the number, this is the equivalent of paying someone $540/hour to do this task for you.

    Economics would predict that the only people who would opt for this service would be people who earn >$540/hour (e.g., stock brokers, lawyers, tobacco industry consultants). But I would bet that the effect is exactly the opposite. If anyone opts for this service, it is probably relatively poor people who don't intuitively do the math and realize how pricey this service really is.

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