A company makes a 5 dollars profit on each non-faulty product it sells. Approximately 2 percent 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 dollars each, what is the profit per item?

For each item manufactured, the company earns $5 if it is not faulty. With 2% faulty, 98% earn $5, contributing 0.98 × $5 = $4.90 per item on average. The faulty items cost 2% × $100 = $2.00 per item on average, so expected profit is $4.90 − $2.00 = $2.90. The correct choice is profit of $2.90.

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