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The railroad emits sparks from its engines which sometimes ignite fires on the farm. There is a 1/10 chance of a fire, and when a fire does occur $50,000 worth of crops are destroyed. It would cost the railroad $6,000 to install a spark arrestor that would prevent fires. The owner of the farm would be willing to pay the railroad no more than $ __________.

Respuesta :

Answer:

$5,000

Explanation:

$50,000 *1/10 = $5,000 cost per chance of fire occurring

AmmarAwais

Answer:

$5,000

Explanation:

The owner of the farm would want to minimize his loss in this situation. The chance of a fire occurring is 1/10 or 10%, and if it does occur, his crops worth $50,000 are damaged. Therefore,

Expected loss = 10% x $50,000 = $5,000

The owner of the farm would want to avoid this expected loss by having a spark arrestor installed to prevent the fire. The cost of a spark arrestor is $6,000.

However, the owner of the farm would only be willing to pay an amount for it which covers his expected loss i.e. $5,000. This is because his loss even in case of a fire does not exceed this amount. Hence, he would be willing to pay the railroad no more than $5,000.

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