you need to buy new tires. You’ve done your research and narrowed your tire choice down to options, Continental Extreme Contact Sport, a max performance summer tire, and Hankook Ventus V2, an inexpensive all-season tire. The all seasons are cheaper and will last longer, and you can drive that one day in Norfolk it snows, but you think you might be able to avoid more accidents if you had grippier tires as the Continentals brake 50-0 about 20’ shorter in the wet and can corner much better.
The all-season tires should last 50,000 miles and you expect your tire cost to average about $125 per year. You estimate, given the accident rate of drivers your age, there is an annual 2% chance you will have a minor accident that costs $3125 (with tires) and a 2% chance you will total your car at a cost of $15,125. And, of course, a 96% chance you will only be out $125 worth of tires.
The sticky summer tires are a little less expensive but are only rated for 30,000 miles so you expect your tire cost to average about $300 per year. The grip is so much better (shorter stopping distance and higher cornering force), though, that you estimate you’ll be able to avoid more accidents. You estimate a 1% chance of a minor accident that costs $3300, and a 1% chance you will total your car at a cost of $15,300. And of course the 98% chance your costs will just be $300.
Which tire should you buy, and what is the difference between the expected values of each tire as an EUAW?
a. The summer tire, by $5.50
b. The all-season, by $175
c. The all-season, by $525
d. The all-season is cheaper [by some other amount], but you should buy sticky summer tires for your sports car anyway.