Probability of Loss

Probability of Loss

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.

 

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

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

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Giovanni Chin-A-Sen, MBA

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