Use the following setup for question
Tom wants to avoid any accidents on the work floor of his factory.If an accident does occur,it would cost him $500,000 in damages.Installing safety equipment would decrease the probability of an accident occurring from 20% to 10%.However,the equipment costs $20,000 to install.
-Would Tom install the safety equipment?
A)Yes because it costs him less than it is worth
B)Yes because it costs him more than it is worth
C)No because it costs him more than it is worth
D)No because it costs him less than it is worth

Question

​Use the following setup for question
Tom wants to avoid any accidents on the work floor of his factory.If an accident does occur,it would cost him $500,000 in damages.Installing safety equipment would decrease the probability of an accident occurring from 20% to 10%.However,the equipment costs $20,000 to install. 
-​Would Tom install the safety equipment?
A)​Yes because it costs him less than it is worth
B)Yes because it costs him more than it is worth
C)No because it costs him more than it is worth
D)​No because it costs him less than it is worth

Quizplus · Accepted Answer

The expected cost of an accident without safety equipment is 20% of $500,000, which is $100,000. With the safety equipment, the probability drops to 10%, making the expected cost $50,000. The reduction in expected cost is $50,000, which is more than the $20,000 cost of the equipment, making it a worthwhile investment.

​Use the Following Setup for Question

Use the Following Setup for Question