Consider a restaurant that wants to avoid kitchen fires. The restaurant could make many investments both to avoid the fires in the first place and to quickly and safely put them out if they do occur. Suppose that the marginal cost (MC) and marginal benefit (MB) of these investments in fire control technologies is illustrated in the followingfigure.

graph 1:

a.If no fire insurance is available, how much investment in fire control would the restaurant purchase? Place pointQnfon the diagram to show the level ofinvestment.
b.Iffullinsurance is available, how much investment in fire control would the restaurantpurchase?
a. The restaurant would purchase no fire control.
b. The restaurant would purchase more fire control than in parta.
c. The restaurant would purchase the same level of fire control as in parta.
d. The restaurant would purchase some level of fire control, but not as much as in parta.

c.The moral hazard incentivized by full insurance creates a deadweight loss. Show the deadweight loss in the diagram by placing the point labeled DWL in the appropriatearea.

d.Suppose that the insurance policy would only cover 50% of the losses from fire; that is, the restaurant has a 50% copay. How would the curves change? How much fire control would the restaurant purchase? Change the endpoints of the curves in the accompanying diagram and place point Qcpto indicate the restaurant's new level ofinvestment.

graph 2:

e.Suppose that the insurance policy would cover only 50% of the losses but the insurance company also offered a 50% discount on insurance to restaurants that installed water sprinklers or other fire suppression technologies. How would the curves change? What quantity of fire investment would be purchased? Move the endpoints of the curves in the accompanying diagram and place point Qdiscto indicate the restaurant's new level ofinvestment.

graph 3:

Question

Consider a restaurant that wants to avoid kitchen fires. The restaurant could make many investments both to avoid the fires in the first place and to quickly and safely put them out if they do occur. Suppose that the marginal cost (MC) and marginal benefit (MB) of these investments in fire control technologies is illustrated in the followingfigure.

graph 1:

a.If no fire insurance is available, how much investment in fire control would the restaurant purchase? Place pointQnfon the diagram to show the level ofinvestment.

b.Iffullinsurance is available, how much investment in fire control would the restaurantpurchase?

a. The restaurant would purchase no fire control.

b. The restaurant would purchase more fire control than in parta.

c. The restaurant would purchase the same level of fire control as in parta.

d. The restaurant would purchase some level of fire control, but not as much as in parta.

c.The moral hazard incentivized by full insurance creates a deadweight loss. Show the deadweight loss in the diagram by placing the point labeled DWL in the appropriatearea.

d.Suppose that the insurance policy would only cover 50% of the losses from fire; that is, the restaurant has a 50% copay. How would the curves change? How much fire control would the restaurant purchase? Change the endpoints of the curves in the accompanying diagram and place point Qcpto indicate the restaurant's new level ofinvestment.

graph 2:

e.Suppose that the insurance policy would cover only 50% of the losses but the insurance company also offered a 50% discount on insurance to restaurants that installed water sprinklers or other fire suppression technologies. How would the curves change? What quantity of fire investment would be purchased? Move the endpoints of the curves in the accompanying diagram and place point Qdiscto indicate the restaurant's new level ofinvestment.

graph 3: