Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 17, Problem 7MC
To determine
Calculate the probability.
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A construction company needs to move lumber onto the roof of a building. If the lumber falls and hits someone it will cause $1,200,000 in damage. Assume that company must choose between the following levels of precaution:
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Chapter 17 Solutions
Managerial Economics: A Problem Solving Approach
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- Suppose that a car - rental agency offers insurance for a week that costs $125. A minor fender bender will cost 34000 whereas a major accident might cost $16 comma 000 in repairs. Without the insurance, you would be personally liable for any damages. There are two decision alternatives: take the insurance, or do not take the insurance. You researched insurance industry statistics and found out that the probability of a major accident is 0.04% and that the probability of a fender bender is 0.18%. The expected payoff if you buy the insurance is $125.00. The expected payoff if you do not buy the insurance is $12.52. Develop a utility function for the payoffs associated with this decision for a risk-averse person. Determine the decision that would result using the utilities instead of the payoffs. Based on the expected payoffs, the best decision is to not purchase the insurance. Are these two decisions consistent?arrow_forwardImagine a market for used computers. There are two types of computers: good and bad. Also imagine that there are 50% of each on the market. Buyers can imagine paying 5,000 for a good computer and 1,000 for a bad computer Sellers want at least 4000 for a good computer and 1500 for a bad computer -What would happen in the market if the buyer thinks that there is a 50% probability that the computers are of poor quality? What type (s) would be sold and what would the price be?arrow_forwardЕОC 12.02 Suppose you are the mayor of a town and you want to increase safety at an intersection. A traffic light will increase safety and reduce fatality risk by 0.5% but costs $100,000. Suppose the value of human life is estimated at $10 million. Should you spend the money to install the traffic light? (Hint: to multiply 1% by 200 you follow this process: 0.01 x 200 = 2). Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Yes, since the expected benefit ($500,000) exceeds the cost. b Yes, since the expected benefit ($150,000) exceeds the cost. No, since the expected benefit ($50,000) is lower than the cost. d No, since the expected benefit ($15,000) is lower than the cost.arrow_forward
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