Answered step by step
Verified Expert Solution
Question
1 Approved Answer
If soda is packaged in bottles, the production cost per unit is 40 cents, the chance of an accident is 1 in 100,000, and the
If soda is packaged in bottles, the production cost per unit is 40 cents, the chance of an accident is 1 in 100,000, and the loss if an accident occurs is $10,000. The expected accident loss per unit is 10 cents, that is 1/100,000 x $10,000. If soda is packaged in cans, the production cost is 43 cents, the chance of an accident is 1 in 200,000, the loss if an accident occurs is $4,000, and the expected accident loss is 2 cents (1/200,000 x $4,000). That is, cans are less likely to explode than bottles, and on average do less damage when they do explode since there is no flying glass. Under strict liability, will the efficient number of sodas be produced? That is, will consumers who value soda less than the total cost (including expected accident costs) refrain from drinking it, and consumers who value soda at or above the total cost of the soda drink it? Explain your answer.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started