Reactors `R’ Us operates a nuclear power plant in Potsdam.In the event of reactor failure, there would be major damages to the North Country. The company can reduce the probability of failure through proper maintenance of the facility. The marginal cost of maintenance is increasing in the amount of maintenance done (and thus decreasing in the probability of an accident). We can write this marginal cost curve as MAC=2-10p (where 0<p<1, and represents the probability of a failure over a 50 year period). The marginal expected damages are an increasing function of the probability of an accident so that MD=2.2+10p. Provide a graph or graphs to illustrate your analysis/answers to the following questions. A. What is the efficient probability of reactor failure? B. If “Reactors ‘R’ Us” thinks that, in the event of reactor failure, they will NOT be found liable for damages, what probability of failure will they choose? C. If “Reactors ‘R’ Us” thinks that, in the event of reactor failure, they will have to pay the full cost of those damages, what probability of failure will they choose? D. If “Reactors ‘ R Us” thinks that, in the event of a reactor failure, there is a 50% chance that they will have to pay for damages, what probability of failure will they choose?

The efficient probability of reactor failure occurs where the marginal cost of maintenance is equal…

Answered: Reactors `R’ Us operates a nuclear…

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter9: Applications Of Cost Theory

Section: Chapter Questions

Problem 2.1CE

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Reactors `R’ Us operates a nuclear power plant in Potsdam.In the event of reactor failure, there would be major damages to the North Country. The company can reduce the probability of failure through proper maintenance of the facility. The marginal cost of maintenance is increasing in the amount of maintenance done (and thus decreasing in the probability of an accident). We can write this marginal cost curve as MAC=2-10p (where 0<p<1, and represents the probability of a failure over a 50 year period). The marginal expected damages are an increasing function of the probability of an accident so that MD=2.2+10p. Provide a graph or graphs to illustrate your analysis/answers to the following questions.

A. What is the efficient probability of reactor failure?

B. If “Reactors ‘R’ Us” thinks that, in the event of reactor failure, they will NOT be found liable for damages, what probability of failure will they choose?

C. If “Reactors ‘R’ Us” thinks that, in the event of reactor failure, they will have to pay the full cost of those damages, what probability of failure will they choose?

D. If “Reactors ‘ R Us” thinks that, in the event of a reactor failure, there is a 50% chance that they will have to pay for damages, what probability of failure will they choose?

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