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2. Suppose there are two consumers who derive benefits from consuming one unit of a dangerous product. Consumer A derives total benefits of $200 while
2. Suppose there are two consumers who derive benefits from consuming one unit of a dangerous product. Consumer A derives total benefits of $200 while Consumer B derives total benefits of $100. The risk of an accident from consuming the product is .01, and the damages from an accident are $5,000. Finally, the firm's costs of producing the product is constant at $75 per unit (40 points in total). a. Is it efficient for the firm to produce and sell the product to consumer A? What about consumer B? Explain and show your work (10 points). b. Suppose that both consumers (and the firm) correctly perceive the risk of an accident. What is the price of the product, and which consumer(s) purchases it under a rule of no liability? (Assume the firm is competitive and sets the price equal to full expected costs per unit). Explain and show your work (10 points). c. What is the price of the product, and which consumer(s) purchases it under a rule of strict liability? Explain and show your work (10 points). d. Now suppose that both consumers misperceive the risk of an accident to be .001. How does this change your answer to part b? How does it change your answer to part c? (Assume that firm continues to the risk correctly). Explain fully and show your work (10 points)
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