Suppose a perfectly competitive firm faces the following marginal benefit and ma
ID: 1122385 • Letter: S
Question
Suppose a perfectly competitive firm faces the following marginal benefit and marginal costs of providing safety to its workers.
Marginal Benefit of Safety
Amount of Safety
Marginal Cost of Safety
$60.00
1
$1.00
$40.00
2
$3.00
$20.00
3
$6.00
$10.00
4
$9.00
$6.00
5
$15.00
a) What is the profit maximizing level of safety for the firm? Why?
b) Assume that workers have perfect information and accurately assess risk. What is the optimal amount of safety from society’s perspective? Why?
c) Suppose the government imposed a minimum safety standard of 5 units of safety. Why might the firm object? Why might some workers object?
d) Suppose that a new technology reduced the firm’s marginal cost of safety to $1.00 per unit of safety provided. How would the firm respond?
Marginal Benefit of Safety
Amount of Safety
Marginal Cost of Safety
$60.00
1
$1.00
$40.00
2
$3.00
$20.00
3
$6.00
$10.00
4
$9.00
$6.00
5
$15.00
Explanation / Answer
a) What is the profit maximizing level of safety for the firm? Why?
It will be the one where MB equals MC or at least it is greater than it. Here MB > MC till 4 units of safety so it is the profit maximizing level of safety for the firm
b) Assume that workers have perfect information and accurately assess risk. What is the optimal amount of safety from society’s perspective? Why?
There is no external risk defined in the question. We have only marginal cost and marginal benefit and so the answer is unchanged. However, risk aversion may indulge in and workers may want maximum saftey level. In that case, social optimal level will be 5 units
c) Suppose the government imposed a minimum safety standard of 5 units of safety. Why might the firm object? Why might some workers object?
Firm objects because such units have MC > MB. Workers might object because a higher cost will imply a lower resultant wage which is not justified to them
d) Suppose that a new technology reduced the firm’s marginal cost of safety to $1.00 per unit of safety provided. How would the firm respond
It does not make any additional effort as the marginal costs are just lowerd by $1 which means, profit maximizing level of safety for the firm is still 4 units.
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