A company makes a $5 profit on each non-faulty product it sells. Approximately 2% of the products manufactured are faulty, with no way to discover which ones are faulty before delivery. If replacement-and-repair costs for the faulty products are $100 each, what is the profit per item?

For each product, the expected profit is the chance it is non-faulty times $5, minus the chance it is faulty times the $100 repair cost. That is 0.98 × $5 − 0.02 × $100 = $4.90 − $2.00 = $2.90 per item. The correct choice is profit of $2.90.

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