Mayers & Smith Corp. has a fertilizer plant. The probability of an explosion at the plant depends on how much the firm spends on safety as given by the table below. If an explosion occurs, the loss to society (damaged equipment, death of employees, etc.) is expected to be $250 million. Safety Expenditure $ millions) 0.0 0.5 1.0 1.5 2.0 2.5 Probability of Loss 0.030 0.020 0.016 0.013 0.011 0.010

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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a. Mayers & Smith Corp. has a fertilizer plant. The probability of an explosion at the plant
depends on how much the firm spends on safety as given by the table below. If an
explosion occurs, the loss to society (damaged equipment, death of employees, etc.) is
expected to be $250 million.
Safety
Expenditure
$ millions)
0.0
0.5
1.0
1.5
2.0
2.5
Probability
of Loss
0.030
0.020
0.016
0.013
0.011
0.010
Find the optimal level of safety from a societal perspective
correct calculation of
marginal cost and marginal benefit;:
correct optimal amount.
Transcribed Image Text:a. Mayers & Smith Corp. has a fertilizer plant. The probability of an explosion at the plant depends on how much the firm spends on safety as given by the table below. If an explosion occurs, the loss to society (damaged equipment, death of employees, etc.) is expected to be $250 million. Safety Expenditure $ millions) 0.0 0.5 1.0 1.5 2.0 2.5 Probability of Loss 0.030 0.020 0.016 0.013 0.011 0.010 Find the optimal level of safety from a societal perspective correct calculation of marginal cost and marginal benefit;: correct optimal amount.
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Follow-up Question
Suppose Mayers & Smith has to pay only one half of the losses that occur. How much
would Mayers & Smith spend on safety? ..
correct calculation of
marginal cost and marginal benefit;
optimal amount.
b. Other things being equal, is the moral hazard problem associated with limited liability
likely to be worse for the risk of product-related injuries to consumers or for the risk of
environmental damage to the public. Explain
Transcribed Image Text:Suppose Mayers & Smith has to pay only one half of the losses that occur. How much would Mayers & Smith spend on safety? .. correct calculation of marginal cost and marginal benefit; optimal amount. b. Other things being equal, is the moral hazard problem associated with limited liability likely to be worse for the risk of product-related injuries to consumers or for the risk of environmental damage to the public. Explain
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