Econ Problem

[theweatherman]

Lifted from my midterm. Was wondering if any of the smart econ guys could tell me what the answer is.

A town discovers that there is toxic dump which could leak and cause $15 million in damage to the municipal water supply. The town has two courses of action

1) Open the dump and pump out the waste at a cost of $10 million. This is a permanent solution and has no chance of leaking.

Benefits = _______ Costs = ________

2) The town can encase the top and sides of the dump in concrete for $0.5 million. To dig under the dump is cost prohibitive. This would not remove the problem and Experts estimate that the dump would then have a .001 % chance of leaking immediately after the work is done or else never. the damages of a leak are $15 million

Benefits if leak = _______ Benefits if no leak = _______

Expected Benefits = _________

Costs = _________

Which policy should the town pursue?



My Answers:


<font color="white"> Policy 1: Benefits = $15 million Costs = $10 million

Policy 2: Benefits if leak = -$15 million

Benefits if no leak = $15 million

Expected Benefits = $14.985 million

Costs = $.5 million

The town should choose policy 2</font>

[Magic_Man]

I think there is one small error here. You don't gain anything if there's no link, or else you don't lose anything when there isn't; in other words, you can't have it both ways. I'd do it this way:

<font color="white">
Policy 1: Benefits = $15 million Costs = $10 million

Policy 2: Benefits if leak = 0

Benefits if no leak = $15 million

Expected Benefits = $14.99985 million ( = 15*0.00001)

Costs = $.5 million

Clearly the choice is still policy 2, though.
</font>

[Phil153]

How can this be a question on an exam if fifth grade reading comprehension can answer it correctly in 0.1 of a second?