COST ANALYSIS OF WARRANTY POLICIES.

This article analyzes two general warranty policies involving an initial free replacement period, followed by a pro rata period. The short-run total costs and long-run average costs under these policies are examined. Formulas for both consumer costs and manufacturer profits under warranty are derived. Also studied are the expected number of purchases over the product life cycle under both policies. Bounds for the expected total costs and expected number of purchases are obtained for the case where the failure distribution of the item is new better than used.

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