Assume that precaution is of a discrete/binary form (i.e., "0" or "1"). An accident, should it occur, would result in $80,000 of harm to a (potential) victim. The probability of the accident is 0.006 (= 6/1000) if no party takes precaution. The (potential) victim can reduce this probability to 0.004 (assuming the injurer does not take precaution) by spending $100 on precaution. The (potential) injurer can reduce the probability to 0.003 (assuming the victim does not take precaution) by spending $150 on precaution. If both parties take precaution, the probability of an accident falls to 0.001.

Question: Please draw a graph showing (in the general context of unilateral precaution) the schedules w_kx_k (private expenditures on precaution); p(x_k)A (expected cost of accidents); and C(x_k; w, A) (expected total/social costs of accidents) where k indexes a given party to a tort. Show the optimal level of precaution pertaining to agent k assuming it is assigned tort liability. Then, on this same graph, show the effects of on (exogenous) increase in w_k on the agent's chosen level of precaution. Comment on this result.