Understanding Protection Plans and Expected Net Gain

The video explains how an electronic store offers a protection plan for TVs, costing $80. If a TV is damaged, the store replaces it at a cost of $1,200. Only 2% of customers need a replacement. The video calculates the store's expected net gain from selling these plans, considering the probabilities of needing a replacement or not. The expected net gain is $56, showing why stores profit from selling protection plans.

What is the cost of the protection plan offered by the electronic store?

• $100

• $80

• $50

• $120

What percentage of customers require a replacement under the protection plan?

• 5%

• 2%

• 1%

• 10%

How much does it cost the store to replace a television under the protection plan?

• $1000

• $800

• $1200

• $1500

What is the net gain for the store if a replacement is needed?

• -$1,120

• -$1,000

• -$1,200

• -$1,150

What is the net gain for the store if no replacement is needed?

• $50

• $70

• $80

• $60

What is the probability that a customer will not need a replacement?

• 0.99

• 0.98

• 0.95

• 0.90

How is the expected net gain calculated?

• By averaging the costs of all scenarios

• By adding the costs of all scenarios

• By multiplying probabilities with net gains and summing them

• By subtracting costs from revenues

What is the formula for calculating the expected net gain?

• Probability of no replacement x Cost of plan

• Probability of replacement x Cost of replacement

• Probability of replacement x Net gain of replacement + Probability of no replacement x Net gain of no replacement

• Sum of probabilities x Net gains

What is the expected net gain for the store from the protection plan?

• $50

• $60

• $65

• $56

Why do stores prefer selling protection plans?

• They reduce the number of returns

• They guarantee a profit

• They increase customer satisfaction

• They lead to a positive expected net gain