Scenario 5.5: Engineers at Jalopy Automotive Have Discovered a Safety Flaw in Flaw

question 23

Multiple Choice

Scenario 5.5:
Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events:
Scenario Probability Cost
A. No one discovers flaw .15 $0
B. Government fines firm .40 $10 million
(no lawsuits)
C. Resulting lawsuits are lost .30 $12 million
(no government fine)
D. Resulting lawsuits are won .15 $2 million
(no government fine)
-Refer to Scenario 5.5. Jalopy Automotive's executives,

• A) if risk-neutral, would fix the flaw because it enables them to have a sure outcome.
• B) if risk-neutral, would fix the flaw because the cost of fixing the flaw is less than the expected cost of not fixing it.
• C) if risk-loving, would fix the flaw because it enables them to have a sure outcome.
• D) if risk-averse, would not fix the flaw because the cost of fixing the flaw is more than the expected cost of not fixing it.
• E) would fix the flaw regardless of their risk preference, because of the large probability of high-cost outcomes.

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Definitions:

Premature Rupture of Membranes

The breaking of the amniotic sac before labor begins, potentially leading to complications.

Oligohydramnios

A condition in pregnancy characterized by a deficiency in amniotic fluid, which can lead to complications for the fetus.

Amniotic Fluid

The protective liquid contained within the amniotic sac that surrounds and cushions the fetus during pregnancy.

Polyhydramnios

An excessive accumulation of amniotic fluid in the amniotic sac during pregnancy, which can lead to various complications.