Question

A lawnmower manufacturer estimates that the probability of a fatal accident caused by the design of its product is 1/10,000 and that the value of a life lost is $1 million. The manufacturer can change the design to eliminate that chance for $79 per mower and stands ready to incorporate all cost-justified precautions. The total cost of changing the design for 10,000 mowers is $ 790000 . (Enter your response as a whole number.) Will the manufacturer change the design ("Yes", or "No")? yes What would the benevolent social planner think about the manufacturer's decision if the true probability of a fatal accident is not 1/10,000 but 1/15,000? Given the "true" probability of an accident and the value of a life of $1 million, the expected death cost for 10,000 mowers is $ 100 . (Enter your response as a whole number.) Would the benevolent social planner agree with the manufacturer's original decision ("Yes", or "No")? no

Answer 1

Answer:

790,000, i.e. $79 x 10,000= 790,000 . Yes, the manufacturer should change the design.  666,667 (when it goes from 1/10,000 to 1/15,000).  It is 500,000 (when it goes from 1/10,000 but ​1/20​,000) . No, the benevolent social planner would not agree with the manufacturer's decision.

Explanation:

In the estimates provided by the manufacturer, the total cost of the design is equivalent to  $79 x 10,000= 790,000. There should be an alteration in the design to remove the necessary precautions. If the probability is different from the estimate provided by the manufacturer, the planner will disagree with the decision made by the manufacturer. For example, a change to 1/15000 will make the total cost to be approximately $666,667.