Economics

HILL [5 pts] Consider an industry with two rms that are simultaneously deciding whether to make costly safety investments such as sprinkler systems in a plant or escape tunnels in a mine. Unlike the rms, potential employees do not know how safe it is to work at each rm. They only know how risky it is to work in this industry. If only Firm 1 invests, workers do not know that safety has improved at only Firm 1's plant Because the government's accident statistics for the industry fall, workers realize that it is safer to work in the industry, so both rms pay lower wages. The prot table below shows how the rms' prots depend on their safety investments. Suppose that the government decides to penalize rms that do not invest in safety. Could that lead to an equilibrium in which both rms decide to invest? If so, how large would the ne for not investing have to be to ensure investment? Firm 2 Not invest Invest Firm 1 Not invest 800, 300 1000, 560 Invest 560, 950 900,900 ML2. {5 pts] ln automobile insurance contracts, it is common for there to be a deductible. For example, the first $500 of damage to the car is not covered, but the insurer covers damage beyond this amount. Does this address moral hazard, adverse selection, or is it just a way to reduce costs for the insurer? Explain briey [i.e. less than 100 words]