Question

Apply the Unilateral accident model with activity level effects that we discussed in class. A person can exercise different levels of care while driving a snowmobile, with the following effects on the likelihood of hitting a cross country skier every 1,000 miles driving. The harm due to an accident is 100,000 on average.

Level of Care	Cost of Care	Probability of Accident
None	0	2%
Moderate	200	1%
High	2,000	0.5%

            a. the socially optimal level of care is None

            b. the socially optimal level of care is High

            c. the socially optimal level of care is Moderate.

            d. not enough information to decide.

Same facts as question 26. If the standard of care is measured by a negligence standard set at the socially optimal level of care,

            a. the snowmobile driver will exercise the moderate level of care.

            b. the snowmobile driver will exercise the high level of care.

            c. the snowmobile driver will exercise no care

            d. the snowmobile driver will exercise at the gym and stay warm.

Answer 1

Socially optimal level of care is when probability of accidents is lowest.

At this level of care

1. reduction of losses from accidents

2. protection of risk-averse parties against risk

So the answer to first questions is High. i.e. the socially optimal level of care is High

If the standard of care is measured by a negligence standard set at the socially optimal level of care, the snowmobile driver will exercise the moderate level of care.

Because (Cost of care + loss due to accident)

1. None -> (0 + 2%*100000) = 2000

2. Moderate -> (200 + 1%*100000) = 1200

3. High -> (2000 + 0.5%*100000) = 2500

Least in moderate, so the answer should be moderate.