Question

3. Safeco Manufacturers is considering engineering options to make one of its products safer. Find the optimal safety expenditure for the product using the data on the costs of safety given below. Assume that the courts find a defendant responsible for $100,000 of damages incurred by a victim, consisting of $35,000 in special damages and $65,000 in general damages. (8 points)

Probability of loss .06 .05 .04 .03 .02

Safety Expenditure $0 500 1400 3350 6500

4.Refer to the previous question. Assume that the courts pay $200,000, not $100,000. Find the optimal safety expenditure for the product using the data on the costs of safety given above. 8 points

Answer 1

Answer: Given data: 0.02 0.06 0.05 0.04 0.03 Probability of loss Safety Expenditure 6600 0 500 3360 1400 * EMV of making o expenses - -0.06x100,000 3 - 6000 * EMV of making 500 expenses --0.05 X 100,000 - 500 = - 5500 *EMV of making 1400 expenses = -0.04X100,000 - 1400 = -5400 *EMV of making 3350 expenses - -0.03 x 100,000 - 3350 = -6350 *EMU of making 6500 expenses = -0.02 * 100,000 - 6600 = -8500 By observing above we can say that, Least cost is with making 1400 expense, Where the EMV Of total cost is 5400 According to chogg rules i can answer the 1st Question