You like speed and as a driver you don't like to wear a seatbelt. You are prone to get into a car accident. Assume that the marginal cost of taken some precaution by wearing a seatbelt is MC = 50 + 5E, where Eis the amount of effort you decide to put in as precautionary measure. The marginal benefits of these precautions is MB=75-5E.
a. If you do not have any driver's insurance, what would be the optimal level of precautions?
b. Suppose that you decide to buy insurance and the marginal benefit with insurance is MB=80-10E.What happens to the optimal level of precaution? Explain.