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After buying a computer system, Sim Thomas must decide whether to purchase (1) a complete maintenance (or service) policy at a cost of $500, which would cover all maintenance costs; (2) a partial maintenance policy at a cost of $300, which would cover some of the costs of maintenance; or (3) no maintenance policy. The consequences, costs and probabilities are given in the following table:
MAINTENANCE
REQUIRED NOT REQUIRED
No Service Agreement $3,000 $0
Partial Service Agreement $1,500 $300
Complete Service Agreement $500 $500
Probabilities 0.2 0.8
(a) What do you recommend?
(b) If the probability of needing maintenance is 0.8 (instead of 0.2) and the probability of not needing maintenance is 0.2, how does this change Sim's decision?
