Probability of Loss
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Find the optimal level of safety (probability of an accident) from a societal perspective using the data on the costs of safety given in the table below. Assume that an accident imposes costs on a victim equal to $500,000.
Probability Safety
of Loss Expenditures
0.030 $ 0
0.020 1,000
0.015 2,000
0.012 3,000
0.0095 4,000
0.009 5,000
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Solution Summary
This solution calculates the optimal level of safety expenditures given the probability of loss.
Solution Preview
There are two costs that impact this calculation: the expected cost to the victim and the safety expenditures. The expected cost to the victim is calculated based on the ...
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