PS2_Solutions_S08 - PAM 423 Problem Set 2 Solutions 1.)...

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Unformatted text preview: PAM 423 Problem Set 2 Solutions 1.) Q1-a,b Q1-c Q1-d Probability of Injury Safety Costs E(Injuries) E(Cost of Injury (Ind.)) E(Total Social Cost) E(Injury Liabilities) E(Cost to Firm) E(Total Cost to Firm) E(Injuries) E(Cost to Firm) E(Total Cost to Firm) 0.055 $0 55 $550,000 $550,000 27.5 $275,000 $275,000 55 $1,100,000 $1,100,000 0.04 $50,000 40 $400,000 $450,000 20 $200,000 $250,000 40 $800,000 $850,000 0.03 $110,000 30 $300,000 $410,000 15 $150,000 $260,000 30 $600,000 $710,000 0.025 $150,000 25 $250,000 $400,000 12.5 $125,000 $275,000 25 $500,000 $650,000 0.022 $200,000 22 $220,000 $420,000 11 $110,000 $310,000 22 $440,000 $640,000 0.02 $250,000 20 $200,000 $450,000 10 $100,000 $350,000 20 $400,000 $650,000 0.015 $500,000 15 $150,000 $650,000 7.5 $75,000 $575,000 15 $300,000 $800,000 a. gG G gG gG $10,000 b. Total cost of risk will be minimized when safety expenditures are $150,000 and the probability of injury is 0.025. c. gG 1/2GgG Since the firm is now only liable for half the injuries to consumers, their expected injury liability is now half the total number of expected injuries. gG gG $10,000 The total cost to the firm is minimized when safety expenditures are $50,000 and the probability of injury is 0.040. d. gG gG G$10,000 $10,000 The company now faces double the cost ($20,000) for any injury that occurs. The total cost to the firm is minimized when safety expenditures are $150,000 and the probability of injury is 0.022. 2.) $12,000 G 0.02 g $60 G 0.10 .% 0.10 gG 0.15 a. g $240...
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This note was uploaded on 05/19/2008 for the course PAM 4230 taught by Professor Tennyson during the Spring '07 term at Cornell University (Engineering School).

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PS2_Solutions_S08 - PAM 423 Problem Set 2 Solutions 1.)...

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