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, 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. 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
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, 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. 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
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Q19
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.
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