A risk-neutral firm can protect its workers by investing in safety precautions. The probability of an accident involving a worker is (1 s), where s is the level of safety chosen by the firm. Thus, the probability that no accident occurs is s. The cost of investing in safety is C(s) = 2s². If an accident occurs, it harms the workers, but it does not directly impact the firm's profits. Use this information to answer questions #18, #19 , # 20. 18. In the absence of government regulation, The firm will invest in safety, s>0, and the outcome will be efficient. b. The firm will not invest in safety, s = 0, and the outcome will be efficient. c. The firm will invest in safety, s>0, and the outcome will be inefficient. d. The firm will not invest in safety, s = 0, and the outcome will be inefficient. e. The firm will invest in safety, so that the probability of an accident will be zero. 19. The government wants to reduce the risk of an accident but cannot directly observe investments in safety. The government institutes a fine, such that if an accident occurs, the firm must pay a F to the government. If an accident does not occur, then the firm does not have to pay anything. Compute the fine, F that the government must impose, so that the probability of an accident is 20% in the SPE of this game. a. 3.6 b. 3.2 C. 1.6 d. 0.8 e. 0 20. Under the system of fines described above, a. The government is the principal, and the firm is the agent. b. The firm is the principal, and the worker is the agent. c. The firm in the principal, and the government is the agent. d. There is market failure due to moral hazard. e. There is market failure due to adverse selection.
A risk-neutral firm can protect its workers by investing in safety precautions. The probability of an accident involving a worker is (1 s), where s is the level of safety chosen by the firm. Thus, the probability that no accident occurs is s. The cost of investing in safety is C(s) = 2s². If an accident occurs, it harms the workers, but it does not directly impact the firm's profits. Use this information to answer questions #18, #19 , # 20. 18. In the absence of government regulation, The firm will invest in safety, s>0, and the outcome will be efficient. b. The firm will not invest in safety, s = 0, and the outcome will be efficient. c. The firm will invest in safety, s>0, and the outcome will be inefficient. d. The firm will not invest in safety, s = 0, and the outcome will be inefficient. e. The firm will invest in safety, so that the probability of an accident will be zero. 19. The government wants to reduce the risk of an accident but cannot directly observe investments in safety. The government institutes a fine, such that if an accident occurs, the firm must pay a F to the government. If an accident does not occur, then the firm does not have to pay anything. Compute the fine, F that the government must impose, so that the probability of an accident is 20% in the SPE of this game. a. 3.6 b. 3.2 C. 1.6 d. 0.8 e. 0 20. Under the system of fines described above, a. The government is the principal, and the firm is the agent. b. The firm is the principal, and the worker is the agent. c. The firm in the principal, and the government is the agent. d. There is market failure due to moral hazard. e. There is market failure due to adverse selection.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Q20
Transcribed Image Text:A risk-neutral firm can protect its workers by investing in safety precautions. The probability of an accident
involving a worker is (1 – s), where s is the level of safety chosen by the firm. Thus, the probability that no
accident occurs is s. The cost of investing in safety is C(s) = 2s. If an accident occurs, it harms the workers, but
it does not directly impact the firm's profits. Use this information to answer questions #18, #19, #20.
18. In the absence of government regulation,
a. The firm will invest in safety, s> 0, and the outcome will be efficient.
b. The firm will not invest in safety, s = 0, and the outcome will be efficient.
c. The firm will invest in safety, s> 0, and the outcome will be inefficient.
d. The firm will not invest in safety, s = 0, and the outcome will be inefficient.
The firm will invest in safety, so that the probability of an accident will be zero.
е.
19. The government wants to reduce the risk of an accident but cannot directly observe investments in safety.
The government institutes a fine, such that if an accident occurs, the firm must pay a F to the government. If
an accident does not occur, then the firm does not have to pay anything. Compute the fine, F that the
government must impose, so that the probability of an accident is 20% in the SPE of this game.
а. 3.6
b. 3.2
с. 1.6
d. 0.8
е. 0
20. Under the system of fines described above,
a. The government is the principal, and the firm is the agent.
b. The firm is the principal, and the worker is the agent.
c. The firm in the principal, and the government is the agent.
d. There is market failure due to moral hazard.
e. There is market failure due to adverse selection.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education