Tom wants to avoid any accidents on the work floor of his factory. If an accident does occur, it would cost him $500,000 in damages. Installing safety equipment would decrease the probability of an accident occurring from 20% to 10%. However, the equipment costs $20,000 to install. 10. What is his expected loss after installing the safety equipment a. $20,000 b. $50,000 c. $100,000 d. $125,000
Tom wants to avoid any accidents on the work floor of his factory. If an accident does occur, it would cost him $500,000 in damages. Installing safety equipment would decrease the probability of an accident occurring from 20% to 10%. However, the equipment costs $20,000 to install. 10. What is his expected loss after installing the safety equipment a. $20,000 b. $50,000 c. $100,000 d. $125,000
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Tom wants to avoid any accidents on the work floor of his factory. If an accident does occur, it
would cost him $500,000 in damages. Installing safety equipment would decrease the probability
of an accident occurring from 20% to 10%. However, the equipment costs $20,000 to install.
10. What is his expected loss after installing the safety equipment
a. $20,000
b. $50,000
c. $100,000
d. $125,000
Expert Solution
Step 1
Introduction:
Expected Loss: the expected loss is the expected loss which is pre-decided that, it will occur in near future.
Given;
Cost of damages= $500000
The initial probability of accident= 20%
Decrease in occurring= 10%
Equipment cost= $20000
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