Question: Problem 2.2

Assume that Acme Tires sells their high performance tires for $180 each and their all weather tires for $135 each. Further assume that the cost of producing a high performance tire is $150 and the cost of producing an all weather tire is $120. Finally, assume that if a tire does not last 40,000 miles, Acme tires will replace it free of charge to the consumer; Acme will incur the cost of replacement, but will not receive any additional revenue.

(a) Calculate the profit earned/loss incurred on; a high performance tire that exceeds 40,000 miles, a high performance tire that does not exceed 40,000 miles, an all weather tire that exceeds 40,000 miles, and an all weather tire that fails to last 40,000 miles.

(b) What is the expected value (expected profit) of producing an all weather tire? Of producing a high performance tire?

(c) What is the variance and standard deviation of producing an all weather tire? Of producing a high performance tire?