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    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 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 ...

    Solution Summary

    This solution calculates the optimal level of safety expenditures given the probability of loss.